Stocks : A hint of scandal

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01/22/2018 | 05:34 pm
The bankruptcy of British facilities management and construction services giant Carillion gives us a new example of collective hypnosis and financial malpractice.
For two years, the management has remedied severe operational problems – budget overspending, a series of incidents on construction sites, unhappy clients who refused to pay, etc. – by getting the company into debt and while carefully hiding this emergency funding thanks to a subtle accounting adjustment (in fact by misusing a tax device). 

Once the problems were conveniently swept under the carpet, the deterioration of the balance sheet and the drying up of the cash-flows passed unnoticed. Don’t ask don’t tell; while they were at it, the management decided to maintain the dividend, even when important repayment maturity dates approached!  

How does one go bankrupt? Gradually at first and then suddenly. The alarm bells went off a few weeks ago when Carillion simply found itself incapable of facing its immediate financial obligations – at this point, there was a mere £29 million of cash left. Here’s how this anchor of the British establishment went from being at the forefront to liquidation while ruining its investors and leaving tens of thousands of employees in the lurch.

It’s always instructive – however poignant – to review the company’s previous annual report, the usual collection of auto-congratulations and a place of common triumphs (“making tomorrow a better place”, “focusing on shareholder value”, etc.), everything cleverly disposed at the heart of a very sophisticated marketing production. 

It’s just as interesting to review the consolidated accounts of the company which, unless dissected one segment at a time using bulky footnotes, didn’t reflect the deterioration of the business at all. At their own risk, the investors who relied on a superficial reading of the company accounts missed the elephant in the porcelain store…

When it comes to tendentious financial communication, others know how to do this well too – the management of BlackBerry for example – former Canadian flagship and faded glory of mobile telephony.

The company has become a true PR machine. To speak with the words of one of the best French analysts in the business: BlackBerry’s CEO John Chen spends so much time on TV that you wonder where he still finds the time to manage the company! 

Earlier this month we featured a valuation of BlackBerry through the prism of the sum of the parts and we backed supporting figures that the current market capitalization projected important – some would say whimsical – growth perspectives for QNX, its operating system.

Recent developments confirm our concerns: not only is QNX being outdone by the competition (in particular Linux or Intel) but on top of that BlackBerry has to face an exodus of clients, among which Toyota and Mercedes.

This doesn’t prevent the management from excitingly promoting its so-called strategic partnerships, for example with technology giants such as Qualcomm, Nvidia or Baidu – when in reality, and only to draw upon the last example, Baidu simply accepts to integrate QNX within its large, open-source ecosystem Apollo which already hosts dozens of competing operating systems!

The harsh reality is that the recovery of BlackBerry’s mobile telephony activity hasn’t worked out, while the monetization of patents and the growth of software activities (BES and QNX mixed) remains anemic, stammering at best.    

But in order to realize this you need to count the cash on the balance-sheet – and note that it doesn’t accumulate – rather than believe the triumphant declarations of a management that’s clearly focused on a single objective: to sell the company for a price that allows its main shareholder (Fairfax Financial) to come out on top.

This tendency to over-promise and under-deliver is typical in overheated markets. The very photogenic (and surely brilliant) CEO of Tesla, Elon Musk, knows a thing or two about this. Musk is a master in the art of hypnotizing the investors, the public and the journalists – notwithstanding some curious irregularities, pointed out here by the best North American specialists in terms of financial market fraud. 

Musk continues to promise beyond the reasonable – in the automobile, the high-speed train and the race into space – to raise capital under extraordinary mild conditions, while Tesla continues to deliver results below the expectations

In the automobile industry, large-scale production is a survival condition and a precious competitive advantage at the same time. Too new, too small, too little capitalized, Tesla simply seems incapable to get there, which doesn’t prevent the company to be traded on the exchange for as much as $54 billion, without ever having generated the least profit for its shareholders. 

In the category under-promise but over-deliver we prefer the discreet but effective management of General Motors: the respected builder gains market share, pays a very generous dividend (without deteriorating its balance-sheet), buys back almost a tenth of its market capitalization, is well-placed in the race for the electric vehicle, beats the consensus of analysts year after year and just raise its profit projections of $6.30 per share – which values the company at less than seven times its profit.

Speaking of which, check our analyses and valuations of Renault and BMW.
Neelie Verlinden
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