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>1Q EPS is $4.99 vs estimates of$4.56!!!!! I'm constantly reading on HN about the deceiving nature of stock buybacks on earnings. Is this not an example? Net

>1Q EPS is $4.99 vs estimates of$4.56!!!!! I'm constantly reading on HN about the deceiving nature of stock buybacks on earnings. Is this not an example? Net income was down year-over-year on "record" per share earnings.

cmdli 7y ago
I wonder. If you're an investor, all you really care about is how much your shares are earning you. If the amount of earnings per share goes up, then the value of that share also goes up.
- adventured 7y ago
  > all you really care about is how much your shares are earning you Properly you care about more than that: you want to know how the business is faring; the thing that actually has to support the EPS. You want to know that you're not watching a dwindling scenario, where you're losing the business and the buybacks are getting you just a bit more than treading water. That's where EPS juicing can be a dangerous camouflage. If juicing EPS with buybacks comes at the cost of longer term growth, it's a disaster for long-term shareholding. Incorrect capital allocation sinks a lot of ships. IBM, as one infamous example, played (is playing) an aggressive financial engineering game where they were seeing their business contract every quarter for years, yet juiced EPS through buybacks. It did absolutely nothing for the stock, which hasn't moved in ten years (Adobe is now worth more than IBM + the former Red Hat, ouch). All those profits shoveled into buybacks and it did nothing to drive consequential returns for shareholders. If shareholders are lucky they've yielded three or four percent per year the past decade, with inflation + buybacks + dividends (while a lot of other prominent tech companies have generated epic returns in that time). It could have gone into building a better cloud business which would have provided growth, which would have rewarded them with a PE ratio that isn't a dismal 13 (Apple has a multiple 2x that with very modest growth). In four or five years AWS will be as large as IBM's entire business (it's already nearly as profitable now). Shareholders have seen some EPS boost while the business gradually vanishes out from under them. Is it more likely that IBM's profits were better spent on buying shares back or driving business growth? You could have rolled up a massive cloud business for $50 billion in acquisitions between 2008-2018 (and ideally not stupidly paid twice what Red Hat was actually worth, near the peak of a stock market bubble).
- ethbro 7y ago
  The value of your shares goes up, in current terms, but your future expectations of growth should go down, which should temper the multiple.
  - __blockcipher__ 7y ago
    That’s simply false. You’re assuming a scenario where the company does buybacks because they’re losing market share, and then implying causality. To put it simply, wherher a company performs buybacks does not tell you what the future growth will be. All it tells you is that the company’s management believes shares are undervalued, or alternatively that they are irrational (to your point, I would characterize most share buybacks as irrational, but _certainly_ not apple’s)
    - ethbro 7y ago
      If a company habitually buys shares back, then yes, that does tell you something about future growth prospects, in comparison to share buybacks. It's a pretty clear sign of management saying "We see no better opportunity than to buy shares at the current price." This may be because management believes shares are undervalued. But it may also be because they have no alternative plans. And continued buybacks would seem to indicate the latter.
gnicholas 7y ago
It’s not deceptive to show that they beat the Wall Street estimates for eps because the analysts who guessed were aware that there were buybacks ongoing. They beat a number that was supposed to have factored in the effects of buybacks.
hedora 7y ago
Blame the tax code for incentivizing buybacks over dividends. These days, EPS contains a blend of past “dividends” payed out as buybacks. The math works out so that when you buy the stock, you’re essentially paying the previous shareholder past dividends would have happend if they hadn’t been replaced with buybacks. Anyway, none of that should change the way you reason about P/E. The main impact is that EPS trends over time aren’t comparable to net income trends, etc.
- tonyedgecombe 7y ago
  I'm not sure they are inherently a bad thing. Though when companies take on debt to finance them it seems dubious.

cmdli 7y ago

I wonder. If you're an investor, all you really care about is how much your shares are earning you. If the amount of earnings per share goes up, then the value of that share also goes up.

adventured 7y ago
> all you really care about is how much your shares are earning you Properly you care about more than that: you want to know how the business is faring; the thing that actually has to support the EPS. You want to know that you're not watching a dwindling scenario, where you're losing the business and the buybacks are getting you just a bit more than treading water. That's where EPS juicing can be a dangerous camouflage. If juicing EPS with buybacks comes at the cost of longer term growth, it's a disaster for long-term shareholding. Incorrect capital allocation sinks a lot of ships. IBM, as one infamous example, played (is playing) an aggressive financial engineering game where they were seeing their business contract every quarter for years, yet juiced EPS through buybacks. It did absolutely nothing for the stock, which hasn't moved in ten years (Adobe is now worth more than IBM + the former Red Hat, ouch). All those profits shoveled into buybacks and it did nothing to drive consequential returns for shareholders. If shareholders are lucky they've yielded three or four percent per year the past decade, with inflation + buybacks + dividends (while a lot of other prominent tech companies have generated epic returns in that time). It could have gone into building a better cloud business which would have provided growth, which would have rewarded them with a PE ratio that isn't a dismal 13 (Apple has a multiple 2x that with very modest growth). In four or five years AWS will be as large as IBM's entire business (it's already nearly as profitable now). Shareholders have seen some EPS boost while the business gradually vanishes out from under them. Is it more likely that IBM's profits were better spent on buying shares back or driving business growth? You could have rolled up a massive cloud business for $50 billion in acquisitions between 2008-2018 (and ideally not stupidly paid twice what Red Hat was actually worth, near the peak of a stock market bubble).
ethbro 7y ago
The value of your shares goes up, in current terms, but your future expectations of growth should go down, which should temper the multiple.
- __blockcipher__ 7y ago
  That’s simply false. You’re assuming a scenario where the company does buybacks because they’re losing market share, and then implying causality. To put it simply, wherher a company performs buybacks does not tell you what the future growth will be. All it tells you is that the company’s management believes shares are undervalued, or alternatively that they are irrational (to your point, I would characterize most share buybacks as irrational, but _certainly_ not apple’s)
  - ethbro 7y ago
    If a company habitually buys shares back, then yes, that does tell you something about future growth prospects, in comparison to share buybacks. It's a pretty clear sign of management saying "We see no better opportunity than to buy shares at the current price." This may be because management believes shares are undervalued. But it may also be because they have no alternative plans. And continued buybacks would seem to indicate the latter.

gnicholas 7y ago

It’s not deceptive to show that they beat the Wall Street estimates for eps because the analysts who guessed were aware that there were buybacks ongoing. They beat a number that was supposed to have factored in the effects of buybacks.

hedora 7y ago

Blame the tax code for incentivizing buybacks over dividends. These days, EPS contains a blend of past “dividends” payed out as buybacks. The math works out so that when you buy the stock, you’re essentially paying the previous shareholder past dividends would have happend if they hadn’t been replaced with buybacks. Anyway, none of that should change the way you reason about P/E. The main impact is that EPS trends over time aren’t comparable to net income trends, etc.

tonyedgecombe 7y ago
I'm not sure they are inherently a bad thing. Though when companies take on debt to finance them it seems dubious.