North America

Earnings Preview: IBM Corp Q2 2017 (IBM)

By: Craig Bowles

Overview

International Business Machines Corp. (IBM) is slated to report 2Q 2017 earnings after the close of trading on Tuesday, July 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.

Outliers & Strategy

Key measures:

  • Non-GAAP Earnings Per Share (EPS): Analyst consensus is $2.75 (range $2.65 to $3.09). (Source: Yahoo! Finance) Consensus was $3.17 three months ago.
  • Revenues: Analyst consensus is -3.8% y/y to $19.47 bln (range $19.11 bln to $19.73 bln). In previous quarters, IBM misses on the top line can weigh on the equity and index futures.
  • Gross Margin: This is a key measure for IBM. Q2 normally bounces back a couple of %. Q1 was a weak 44.5%.
  • Adjusted Earnings Per Share (EPS) Guidance (FY2017): Guidance is for “at least $13.80. The Street estimate is $13.70 (range $13.03 to $13.90).
  • IBM’s trailing P/E of 12.6 compares to a five-year average of 12.4; Price/Book of 7.9 compares to a five-year average of 10.8; Price/Sales of 1.8 compares to a five-year average of 2.0; Price/Cash Flow of 9.5 compares to a five-year average of 9.5. The stock yields 3.7% compared to the 5-year average 2.7%.
  • Analysts view IBM with 6 Buy, 15 Hold, and 6 (3 two qtrs. ago) Sell ratings. (source: MarketBeat.com)
  • Insiders sold 12,569 shares over the last three months and sold a net 78,523 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 3.68%. Options are pricing in an implied move of 2.60% off earnings.

Recent News

  • 06/23: Bernstein thinks IBM’s mainframe business may be increasingly a liability for profit, as workloads move to the cloud. Even if a refresh of the mainframes adds up to 19 cents in earnings per share in the second half of this year, it’s “not enough to get us comfortable with IBM’s fiscal 2017 EPS guidance,” according to a post on Barron’s.com.
  • 06/07: IBM is losing Facebook’s “WhatsApp” as one of its marquee cloud computing clients, according to a post on Barron’s.com.
  • 06/07: Stifel still has a Buy rating on IBM after a shortfall in its “infrastructure services” during Q1 and suggests the company may be helped by a few large deals signed since then, including one to take over 1,500 employees of Lloyd’s Bank, according to a post on Barron’s.com.
  • 05/05: Buffett conceded that he has changed his view of IBM’s valuation and sold shares at least as low as $172/share. (IBM Retirement Fund reduced holdings in its IBM stock to 12,451 shares as of March 31 from 82,802 on Dec. 31. Wells Fargo reduced its stake to 65,000 shares from over 430,000.), according to a post on Barron’s.com.
  • 05/03: Moody’s Investors Service today cut its rating on shares of IBM’s “senior unsecured” borrowing to “A1” from “Aa3,” citing spending by the company that has hurt Big Blue’s cash flow, and also a view “challenges” will persist as it changes its business model, 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 2016. March 2013’s $215 was the all-time high. The recent test of $150 is back at the point and figure chart uptrend, so hopefully the stock won’t take that next correction leg down.  (Chart courtesy of StockCharts.com)

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 fourteen quarters but even favorable initial reactions have been short-lived. Declining stock buybacks amid declining revenue appear to have weighed on the stock in in recent years but year-over-year comparisons have at least become easier. IBM has beaten consensus by an average of 7c the past four quarters. Estimize consensus for Non-GAAP EPS of $2.79 on revenue of $19.521 bln compares to analyst consensus of $2.75 on revenue of $19.47 bln. Gross margin should bounce back somewhat but Q1 was unusually weak.

 

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