North America

Earnings Preview: IBM Corp. Q1 2017 (IBM)

By: Craig Bowles

Overview

International Business Machines Corp. (IBM) is slated to report 1Q 2017 earnings after the close of trading on Tuesday, April 18th. Results are typically released at approximately 4:05 p.m. ET and will be followed with a conference call at 5:00 p.m. available through IBM Investor Relations.  IBM is a member of the Dow Jones Industrial Average, with broad market influence and could impact on the index futures.

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Outliers & Strategy

Key measures:

  • Non-GAAP Earnings Per Share (EPS): Analyst consensus is $2.35 (range $2.23 to $2.44). (Source: Yahoo! Finance) Consensus was $2.53 three months ago.
  • Revenues: Analyst consensus is -1.6% y/y to $18.39 bln (range $17.97 bln to $18.83 bln). IBM misses on the top line can weigh on equity and index futures.
  • Gross Margin: This is a key measure for IBM. Q4’s 51.0% improved from Q3’s 48.0%.
  • Adjusted Earnings Per Share (EPS) Guidance (FY2017): Guidance is for “at least $13.80. The Street estimate is $13.78 (range $13.42 to $13.91).
  • IBM’s trailing P/E of 13.8 compares to a five-year average of 12.4; Price/Book of 8.8 compares to a five-year average of 11.0; Price/Sales of 2.0 compares to a five-year average of 2.0; Price/Cash Flow of 9.6 compares to a five-year average of 9.5. The stock yields 3.3% compared to the 5-year average 2.7%.
  • Analysts view IBM with 6 Buy, 14 Hold, and 5 (3 last qtr) Sell ratings. (source: MarketBeat.com)
  • Insiders sold 463 shares over the last three months and sold a net 81,395 shares in the past year. (source: NASDAQ.com) In October 2016, IBM approved a $3 billion stock buyback. As recently as 2014, IBM spent $13.7 billion to buy back shares. ($110 bln since year 2000 on buybacks compares to $90 bln on R&D.)
  • IBM shares have a 1-day average price change on earnings of 3.53%. Options are pricing in an implied move of 2.29% off earnings.

Recent News

  • 04/10: Bernstein believes IBM’s free cash flow was over-stated last year by a couple billion and could again this year, according to a post on Barron’s.com.
  • 03/28: RBC Capital lists IBM among companies of relative safety in a scenario where the “Trump trade” reverses in the coming months, according to a post on Barron’s.com.
  • 03/15: Morgan Stanley’s 47-page report assessing the free cash flow that will be generated by cloud computing out to 2025, and they conclude that IBM is the most immediate beneficiary of the promise of cloud, according to a post on Barron’s.com.
  • 03/08: IBM stock fell after their investor day in New York. Analysts noted a clear emphasis was the creation of an entire strategy dependent upon Watson-led growth vectors which are not fully developed or generating material revenue, according to a post on Barron’s.com.
  • 03/07: Stifel reiterated a Buy rating on IBM after a strategic partnership was announced with Salesforce (CRM) focused on artificial intelligence, according to a post on Barron’s.com.
  • 02/06: Bernstein reiterated a Market Perform rating on IBM while cautioning rising investor hopes with “the company is still very much in the throes of a turnaround, with success uncertain,” according to a post on Barron’s.com.

Technical Review

IBM shares at $182.79 in February completed three legs up since testing twice below $115 at the beginning of the year. March 2013’s $215 was the all-time high. The stock moved below the 50-day moving average a month ago and the major averages are now testing. Point and figure technicians show a balance area around $156 if the stock were to test below the 200-day moving average.  (Chart courtesy of StockCharts.com)

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Summary

IBM appears to be “betting the farm” on the cloud and artificial intelligence with Watson. The company has only missed earnings expectations one time out of the last thirteen quarters but even favorable initial reactions have been short-lived. Declining stock buybacks amid declining revenue appear to have weighed on the stock in late 2014 and 2015 but year-over-year comparisons have become easier. IBM has beaten consensus by an average of 13c the past four quarters but two of those quarters were 6c beats. Estimize consensus for Non-GAAP EPS of $2.38 on revenue of $18.583 bln compares to analyst consensus of $2.35 on revenue of $18.39 bln. Gross margin bounced back above 50% in Q4.

 

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