North America

Earnings Preview: IBM Corp. Q3 2017 (IBM)

By: Craig Bowles

Overview

International Business Machines Corp. (IBM) is slated to report 3Q 2017 earnings after the close of trading on Tuesday, October 17th. 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 $3.28 (range $3.14 to $3.36). (Source: Yahoo! Finance) Consensus was $3.38 three months ago.
  • Revenues: Analyst consensus is -3.3% y/y to $18.59 bln (range $18.35 bln to $18.96 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 improved as expected to 47.2% and Q3 would normally slip back closer to 46%.
  • Adjusted Earnings Per Share (EPS) Guidance (FY2017): Guidance is for “at least $13.80. The Street estimate is $13.77 (range $13.00 to $14.04).
  • IBM’s trailing P/E of 12.4 compares to a five-year average of 12.4; Price/Book of 7.5 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 9.2 compares to a five-year average of 9.5. The stock yields 3.9% compared to the 5-year average 2.7%.
  • Analysts view IBM with 7 (6 last qtr) Buy, 14 Hold, and 6 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 0 shares over the last three months and sold a net 40,714 shares in the past year. (source: NASDAQ.com) IBM has been buying back $3.5 to $4.5 billion of stock since 2014 when they 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 3.80%. Options are pricing in an implied move of 2.19% off earnings.

Recent News

  • 09/07: IBM is planning to spend $240 million over the next decade to create an artificial intelligence research lab at MIT.
  • 08/24: IBM could rise 35%. New analysis by Morgan Stanley finds that gross profit (product and service level profits that don’t factor in corporate-level contortions) is both a relatively clean measure for tracking IBM’s progress, and one that has had a high correlation with its share price movements. It’s about to begin pushing higher for the first time in five years, according to a post on Barron’s.com.
  • 08/22: IBM partners with Nestle, Unilever and other food giants to trace food contamination with blockchain, according to a post on CNBC.com.
  • 08/15: RBC Capital reiterated a Sector Perform rating on IBM but suggests the stock may see a short-lived December quarter benefit from the recent introduction of a new mainframe computer, the z14, 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. Falling much below $140 would be a worry as the stock traded in a nice balance area in 2016 at around that level and this past summer’s low was at $139.13.  (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 fifteen quarters but even favorable initial reactions have been short-lived. Less being spent on 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. Analysts are slightly less pessimistic and insider selling dried up the past three months. IBM has beaten consensus by an average of 11c the past four quarters. Estimize consensus for Non-GAAP EPS of $3.31 on revenue of $18.727 bln compares to analyst consensus of $3.28 on revenue of $18.59 bln. Gross margin wound normally slip a bit in Q3 but should remain above 46%.

 

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