iBankCoin
Joined Dec 1, 2015
135 Blog Posts
@JeffMacke

Rotten to the Core: Weekend Buyback Reader

Looking for some Saturday morning Doomsday Reading? Sure you are!

Start with my recent pieces on Buybacks. I continue to think the best shorts of the next few years will be merchants who have been issuing debt to buyback shares.

To sum up the basic theme: low-margin companies taking on debt to repurchase stock is dumb on the surface. The fact that it’s been sold to America as “returning cash to shareholders” is going to make us all look like fools in 25 years.

My collected buyback screeds from the last month:

 

Wall Street Screwed You Again!

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Still iDiotic: How’s the Buyback Going, Apple?

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Macy’s is Dead (from Jan 7)

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Big Blue Bloodbath (Jan 20)

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How’s The Buyback Going, AutoNation?

My insanely awkward 2013 chat about buybacks with AutoNation CEO Mike Jackson.

 

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Wholey F-d: WFM Shares Drop Below Buyback Bottom

Actual quote from Whole Foods' November 4th conference call!
Actual quote from Whole Foods’ November 4th conference call!

Low rates make this a “perfect situation” to fund buybacks with cash.. said Whole Foods in November with the stock in the 30’s.

 

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Amazon Destroyed! What You Need to Know $AMZN

As I suspected might happen, Amazon shares are being clubbed mercilessly after the company missed Q4 estimates and issued laughably broad guidance.

Amazon stock is down about 10% early and the chart is frankly sort of ugly. There’s a combination head and shoulders / Brooding Affleck Batman (the worst kind) forming. Yesterday’s rally was a cruel trap, driving shares into weak hands. There’s some support on Batman’s shoulder but the current shareholder base most likely gets scared out lower.

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Is it a buy? If you’re patient but you have to understand what that means with Amazon. Yesterday I showed a chart of Amazon stock pullbacks over the last 10 years. Her’s what the long-term looks like (hide the women and children):

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To capture Amazon’s gains you’ve have to ride it out periods like the 95% spelunking after the dot-com bubble burst. Doing so is all but impossible for most investors. Investors with stomachs made of iron (or who were lucky enough to forget about owning the stock entirely) have been insanely well rewarded for their faith:

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Amazon Has One Job

In many ways last night was quintessential Amazon. The company demonstrated total disregard for short-term planning in favor of growing the business. They don’t care about anything except customers. They never have. This tunnel vision often creates a cultural divide between execs and analysts during conference calls.

Here for instance is CFO Brian Olsavsky on what’s happening in China:

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To me that’s a perfect response. Every retail CFO should have exactly the same answer. As for estimates, Olsavsky cautioned that nuanced predictions of even the ongoing quarter are “impossible” then said Amazon will earn somewhere between $100 million and $700 million in Q1 versus $255 million last year. That puts the earnings growth rate for this quarter at somewhere between -60% and 155%. Best of luck plugging that into a spread sheet.

Amazon’s indifferent approach to guidance should have been exactly in line with expectations. Amazon has done precisely the same thing literally every quarter since its IPO. Here’s a clip from the Amazon S-1 in 1997:

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20 years ago Amazon set the goals of “(i) Extending its brand position (ii) Provide its customers with outstanding value and a superior shopping experience” then says achieving those goals will incur “substantial operating losses for the foreseeable future”.

Amazon has spent 20 years living up to that vision. Anyone who was surprised by the quarter or that Amazon is going to spend billions killing the shipping industry because same day shipping is the future (and Amazon is already doing it in 25 markets) simply hasn’t been paying attention.

Amazon is like the Grateful Dead or Opera. You either get it or you don’t. Even if you love it, and I freaking Love Amazon, you don’t need to be there all the time. I’ve been out of Amazon for a while but I’m looking to start to nibble. In other words, I’m following the plan I laid out at at the beginning of the year (from Jan 4):

Facebook

If not I’ll wait. They’ll be back.

Value-Trap?

The quarter was fantastic as far as I was concerned. North America revenue grew 24% to $21.5b in the fourth quarter. For the sake of comparison, Amazon started this year with about the same top-line as Target. Target is expected to do $21.9b total in Q4 which represents a growth rate of ~0% (zero percent).

Amazon gets a lot of abuse for being over-valued. Some of that is deserved and some is because Amazon is often covered by tech analysts who typically don’t know (or care to know) much about retail. Let me put Amazon’s US growth into context. The NRF says holiday retail sales grew a meh 3% in 2015. Online grew about 9%. Again, Amazon grew 24% year over year just in North America. Of the top-10 mass merchants in the country CostCo has the next fastest top line expansion. For the Holiday quarter Cost might grow 5%.

Amazon is playing a different game than the rest of the industry. There is no “correct” valuation for Amazon because nothing like this has ever existed. No retailer has ever been this big relative to the industry and still growing anywhere near this fast. Amazon’s numbers look like young Gretzky getting 200 points in one NHL season or Barry Bond’s “Big Head Era” stats. That’s just as a retailer. No one on earth knows what AWS could be worth but it’s a lot.

Amazon makes money. Not much but remember even really good US retailers are only netting 6 or 7 cents of profit on every dollar. Between breaking even while sucking up billions of dollars in market share a year or grinding out 5% growth and net margins I’ll take the former. Any valuation work beyond that is just doodling.

If you get a 50% pullback back up the truck. Anything less than that is almost noise as far as Amazon sees the world.

 

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Amazon Rallies! Should You Chase It? $AMZN

Amazon is up 8% today because FANG. I’m serious. No one wants to miss the dip the way they did on Facebook so they’re buying Amazon ahead of earnings this afternoon.

Amazon is less than 10% off record highs from about a month ago. I love this company so much I could write adult fan fiction novels about Amazon’s business model. Not even I would buy Amazon here.

The stock could do anything tonight. Expectations are huge and Bezos literally does not care about earnings estimates at all. Throw in this rally and it’s a rough combination into news.

In January of 2014 Amazon missed by 20-cents and the stock fell 10%. That was 2 months after Amazon’s absurd 60 Minutes drone segment. (Note: Amazon will never have drones.) Shares fell more than 25%, total, and it barely counted as a blip by Amazon standards. You don’t need to chase this stock. It comes to you.

 

Excerpt from my coming book, “So you wanna buy Amazon up 8% ahead of earnings”…

 

You can probably wait...
You can probably wait…

 

 

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How’s the Buyback Going, AutoNation? $AN

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I interviewed Mike Jackson, CEO of AutoNation a few years ago for Yahoo Finance. One of the topics I wanted to address was the psychotically aggressive repurchase of its own shares.

I’m not a TV person by birth. I came at it backwards from investing. That being the case I liked to use the pre-interview time with subjects to get as much information as I could to facilitate an easier on-air chemistry. Jackson is a good CEO and a strong personality. As the crew set up our shots we chatted about business and shared our backgrounds. We spoke frankly, because that’s how business people speak to each other in private.

After a few minutes I asked about the repurchases. “With a huge expansion strategy and a cyclical business how come you don’t want to save up some cash for a downturn? You guys could kill it buying dealerships if you’re liquid in the next recession.”

Jackson looked at me as if I’d just keyed the best car in the showroom.

Finally he spoke. “Jeff… it was Jeff, right?… We’ve been buying back shares for years. The stock is higher. That makes me happy. My board is happy. Buybacks are great for this company.”

He was trying to go over the top like he was Johnny Chan and I was some tourist at the Taj. Not possible.

“Mike, I get it. Your people just survived the meltdown. Being bullish on your own company is the right message. But, man, $750 million is a lot of money. It’s, what, 10% of the whole market cap? And you’re buying other dealerships which means endless training and rebranding. That’ll be expensive. AutoNation is crushing. The stock is great. Why chase it?”

He stared at me. I tried to break the ice, chuckling, “Are you doing a stealth LBO?”.

During the awkward silence that followed I mentally checked my tone. I wasn’t trying to be a jerk. We were just two business guys talking. I’d say the same thing to a friend only with swear words. I wasn’t rude. I can’t stand being rude but I don’t do bowing deference. I literally can’t. It’s a professional liability.

I returned Mike’s blank look as the sound guy ran a cable down my back.

“Jeff” he said with flashy forbearance. “The stock is higher. I wish I could get paid based on the upside we would have made on our stock. Let’s not talk about this.”

And we didn’t. Because I wasn’t Mike Wallace staring down a terrorist. Buybacks are a wonky topic. My job was to get good video. The best way to do that was to talk about whatever Mike wanted. Make it an easy conversation. Just like 2 friends chatting, only with less awkward reality stuff.

Checking in…

That was 2013. Since then AutoNation has spent more than $800 million on additional repurchases. The board has reduced the shares outstanding by more than 20% and the stock was doing great…

Screen Shot 2016-01-28 at 8.09.42 AM… right up until it wasn’t.

Debt is a cruel mistress, Mike Jackson. She’ll be super low-maintenance and chill for years then, right out of nowhere break into the house and boil your kid’s bunny.

AutoNation missed earnings today. This makes the second time the stock is getting punished for the same miss as Jackson effectively warned on a TV appearance earlier this month. Shares are down more than 30% year to date and only 13% higher since the start of 2012.

Margins were terrible in the 4th Q, despite Americans buying more cars than ever last year. Jackson says we’re buying SUVs, not the luxury rides AN was stocked up on all year. Now he’s got an inventory problem which means more margin issues. 3 years of stock gains have been wiped out in a month.

I’m not sure what the fix is for AutoNation but you know what I bet would come in handy for the company right now? About $1.6 billion in cash. It could fund the shares I’m confident AN is in the market buying as I type.

Be careful on this one.

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Stocks Trapped in Iron Range! Charts and Trades

Stocks have traded in the same ~2% range for 4 straight days.

The Central Bank madness is just noise. No one was ready to take risks after such massive overnight moves. Once stocks hit the upside of the range Yellen would have needed to launch QEndless to keep us higher. All seemed lost by the time the bell saved us all from apparent collapse

Then FaceBook kicked a mudhole in estimates after hours and rose more than 12%.

Here’s how the S&P500 looks as of the close today. We’ll rip,it up and start over again tomorrow.

 

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Wall St Screwed You. Again. Buyback Mailbag $AAPL $IBM

Mailbag on the math of stock buybacks (warning: this is a little wonky… it won’t hurt my feelings if you opt out now)

Amiable Reader writes:

Hi Jeff, love the article and financial insight. Just to play devil’s advocate (extra Pacino) for the moment, what happens if a company doesn’t retire its shares? I don’t believe it’s a requirement for them to retire their shares, but I could wrong on this. Does it depend on the buyback agreement? Would appreciate any commentary on this. Thanks in advance.

AR

You can’t have your shares and buy them back too. If stock isn’t retired it counts for calculating EPS. Raising EPS (and the fallacious “supply and demand” argument) are the whole point of buybacks.

There are a number of accounting techniques for putting repurchased shares into suspended animation. As usual on Wall Street, the more you dig into them the more you realize they are complicated bc they are bullshit.

It’s pretty simple: If repurchased shares still exist as freely traded product they have to be counted for earnings purposes. That would make a company effectively long shares it could never sell; a purely speculative play by the BOD. No BOD wants that burden and history suggests they are right to avoid the accountability since boards’ timing is generally lousy despite literally infinite material non-public information.

But here’s the magic: if shares are retired they no longer have any tangible value that can be specifically footed to the trading value of other shares. Repurchased stock is dead and the cash is in the hands of the seller. Where once there was a liquid stock and cash there is now just cash. So half the previously existing economic value has been eliminated by the outstanding share count has gone down. Which is fine until you remember EPS isn’t a measure of financial health. Net income is. Long-term shareholders who seek long term value growth should threaten to burn down the HQ of any company even hinting at a repurchase.

What the company retains are debt load and interest payments. Companies very, very seldom flip from buying back stock to doing secondaries. Doing so would absolutely kill their shares. That means liquidity is restricted even beyond interest. So a buyback is financially tantamount to buying shares and lighting them on fire then paying an annual fine for pollution. If you’re lucky you’re interest rate paid on buyback loans is roughly equal to the dividend payments saved.

Companies are in a literal economic sense the worst conceivable buyers of their own shares.

In the short run there’s a case to be made for repurchases. Especially with the activist huckster salesmanship, having a company bidding for stock can give shares a boost. Which is exactly what you as investors don’t want to happen. You want dips. Those are buying opportunities. If I buy a dip I get to sell later, keep the profits and buy stuff. If a company buys its own dip it gains nothing (ex executives incented with EPS goals and stock options).

Competing with me in the marketplace for you own stock isn’t shareholder friendly. It’s bullshit. Buybacks steal investor profits in favor of nothing. Because, as we are be reminded this earnings season, there is 0 evidence that buybacks contribute to the longterm intrinsic value of a company.

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By the time capital allocation f-ups kill a company the activists are usually gone. The exception is Berkshire where Buffett has chosen to keep the zombie shell of what used to be IBM on the books.

All you really need to remember is this: Every CEO bragging about how a stock has gone up during a buyback program is either an idiot or just begging someone like Warren Buffett to tell him he’s a good boy.

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Apple’s Buybacks: Still iDiotic

Last August during the China meltdown Apple CEO Tim Cook skirted SEC rules by sending an emailing to CNBC star Jim Cramer. The goal was reassuring investors.

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Cook was talking his book. During the quarter ending September Apple spent $14 billion repurchasing its own shares at an average cost of $114. The company also completed a $6 billion “Accelerated Share Repurchase” last July, retiring 10m shares (listed below as part of a Q3 transaction but completed in July, per Cook himself during the Apple Q4 call).

During the last 3 months of 2015, in the quarter reported last night Apple bought $3b worht of stock on open market purchases at an average cost of just over $115 and yet another Accelerated Repurchase for $3b to get 20m shares on initial settlement. (For a good primer on why the average cost of accelerated repurchases is so much higher than open market transactions see this from the Motley Fool).

From Appleinsider.com
From Appleinsider.com

All of which would have been fantastic had Apple not discovered what the rest of the world already suspected: China isn’t great.

In his opening preamble Cook spent 2/3rds of the opening 750 words talking about currency, Chinese headwinds and the generally horrific turn the world has apparently taken since Cook emailed Cramer and launched an aggressive battle to protect Apple’s shareprice by throwing money at it.

We’re seeing extreme conditions unlike anything we’ve experienced before just about everywhere we look” Cook said, all but ululating as he handed the media an almost perfect spotlight quote.

Cook went on to guide lower for the current quarter. Product shipments were a disaster on the iPad. Watch sales weren’t specifically disclosed (which means they are insignificant) and margins are a question. Currency alone swayed revenues enormously according to Apple itself. Those facts should pretty much eliminate the idea that companies in general, or at least Apple in particular, has a better guess than anyone else when it comes to their future results and share price.

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Theoretical Cash

The company says it has $216 billion in cash but that’s misleading, to be nice.

Apple has about $16.5b in US cash, $53b in debt and another $35b in non-current liabilities. 93% of Apple’s cash is overseas and it currently costs 40% to repatriate foreign earnings.

How do you value all that foreign cash? You have to discount it dramatically. If you assume Apple repatriates the money at full tax rates (40%) Apple has an amount equal to $136b in real value. If you assume Apple can keep skirting the repatriation problem by borrowing cash in the US against the foreign cash of indeterminable value you have to discount the money for the interest paid, at the very least.

All of which ignores all that currency trouble Cook was nattering about last night. If Apple gets paid in China when does the money become dollars? What if cash flows drop? IBM once thought it had plenty of cash for buybacks. It spent a decade spending cash on shares and missing opportunities. Now IBM has neither the money nor the ability to execute.

None of this matters to buyback fanboys, the most vocal of which being Apple shareholders. Here’s AppleInsider’s take on buybacks from last October:

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The key parts there are the assumption that both shares and earnings will rise. Also, Apple executives are uniquely positioned to “fully grasp the potential of the company in the global markets it is operating across.”

Everything about this is wrong.  More concerning still, Apple itself demonstrably has no grasp on what’s happening in China this year. Consensus estimates, the muddy bedrock on which buyback logic rests, are coming down as I type.

Rising debt, lower margins, uncertain earnings and a recent track record of buybacks utterly failing to help the shares. What’s the answer?

More buybacks, natch.

“We plan to be very active in the US and international debt markets in 2016 in order to fund our capital return activities.”

Selling Shares to the Least Efficient Buyer

Buybacks are the biggest scam since GreenMail. A company repurchasing shares is literally the least efficient buyer on earth. If you had $100 in cash yesterday you could have bought 1-share of Apple from me. Less the drag of transaction fees we would each still have about $100, or $200 total.

When Apple or other companies buy back stock they retire the shares. That’s the whole point. If Apple didn’t retire the stock the repurchased shares would drag on EPS. What’s more, the entire underlying assumption of buybacks is reducing shares outstanding will raise the price of the stock by an equal amount (which only makes sense if the market is efficient… and if the market is efficient there shouldn’t be “irrational” price drops in the first place).

The only buyer to get nothing out of Apple’s share appreciation since it launched its buyback program in 2013 is Apple itself.

The key to buybacks is that the shares outstanding disappear. So, unlike every other purchaser on earth Apple can’t practically sell shares purchased on the open market. Companies doing buybacks profit less than literally every other potential share holder when a stock rises.

If Apple buys my 1 share I then have $100 and Apple has 1 share which it immediately shreds. 50% of the total pie has been destroyed. Apple doesn’t get to count appreciation on repurchased stock. It means nothing to them. The cash and the stock are gone, all Apple has left are the interest payments. Just like John Law trying to stop the implosion of the Mississippi Bubble in 1720 Apple is effectively buying stock and lighting it on fire.

If the stock goes higher and earnings rise and cash flows stay robust that’s no problem. Should anything in that list not happen as expected the whole model falls apart immediately.

The Cult of Buybacks

I’ve harassed Apple on this point in the past and been shelled for it. I don’t care. Buybacks are a scam and I’m one of the few people who understands why and doesn’t have a financial interest in keeping it a secret.

History will be unkind to the capital allocations made by corporate America during the era of free rates. As usual, individuals are the sucker at the poker table with the Buffett’s and Icahn’s of the world.

Honestly, what would you expect?

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Daily Buyback Disaster: Whole Foods $WFM

Shares of Whole Foods Market are getting kicked in the face with organic-covered boots, down 5% and below $30.

It’s the lowest WFM has traded since the company missed estimates and announced a $1 billion debt-funded buyback program last November 4th!

Actual quote from Whole Foods' November 4th conference call!
Actual quote from Whole Foods’ November 4th conference call!

“Stock buybacks are accretive in the short-term and the long term” raved CEO John “No Relation” Mackey. Nothing about that sentence is necessarily true. Coming as it did at the same time as an earnings warning, which the company presumably didn’t see coming, it’s just gibberish talk.

Mackey said he intended to spend most of the $1 billion in the first half of the year (meaning starting immediately as this WFM’s Q1 2016 started November 1st). So presumably some of the money chasing WFM higher in December came from the company itself. It’s unclear if WFM is still buying now that shares are at 2011 levels.

Remember, retired shares aren’t re-issued. They just disappear along with the money it takes to buy them on the open market (or the other ways WFM mentioned). What remains are the debt payments.

Whole Foods has an organic margin problem with no easy solution. It knows profits are declining yet insists buying shares is a good idea despite the fact that doing so comes with interest payments that make future profitability less likely.

Shareholders have a larger share of a less profitable business with reduced potential and higher debt.

 

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