North America

Earnings Preview: IBM Corp. Q4 2016 (IBM)

By: Craig Bowles

Overview

International Business Machines Corp. (IBM) is slated to report 4Q 2016 earnings after the close of trading on Thursday, January 19th. 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 $4.89 (range $4.63 to $4.97). (Source: Yahoo! Finance) Consensus was $4.96 three months ago.
  • Revenues: Analyst consensus is -1.6% y/y to $21.71 bln (range $21.14 bln to $22.31 bln). In previous quarters, IBM misses on the top line have triggered noticeable declines in both the equity and index futures.
  • Gross Margin: This is a key measure for IBM. Q3’s 48.0% should improve in Q4 if recent history holds.
  • Adjusted Earnings Per Share (EPS) Guidance (FY2017): Guidance, if available, would compare to the Street estimate of $13.84 (range $12.64 to $14.66).
  • IBM’s trailing P/E of 13.7 compares to a five-year average of 12.4; Price/Book of 9.4 compares to a five-year average of 10.8; Price/Sales of 2.0 compares to a five-year average of 2.0; Price/Cash Flow of 8.7 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, 15 Hold, and 3 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 27,682 shares over the last three months and sold a net 52,575 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 3.64%. Options are pricing in an implied move of 4.14% off earnings.

Recent News

  • 12/30: Cornerstone Macro recommends IBM as the top “Dogs of the Dow” stock for 2017, according to a post on Barron’s.com.
  • 12/29: IBM Watson team is working on applying their Artificial Intelligence system to wealth management—from identifying clients’ investment preferences to identifying those who are likely to leave an advisor, according to a post on Barron’s.com.
  • 12/16: Morgan Stanley identifies cloud as potentially a big payoff for IBM in 2017, according to a post on Barron’s.com.
  • 12/14: Credit Suisse believes IBM will miss the 2017 earnings-per-share consensus estimate, at least operationally. A series of nonoperational, nonrecurring items may support EPS while structural profitability erodes. See’s IBM’s true earnings power at merely $12.50 a share versus consensus of $13.90 for 2017, and lowered the fiscal 2017 EPS estimate to $12.64 from $12.74. Has a 2018 EPS estimate of $12.56, according to a post on Barron’s.com.
  • 12/13: IBM to invest $1B in U.S. employees while hiring of 25,000 over next four years, according to a post on usatoday.com.
  • 10/24: UBS has a Neutral rating on IBM while the stock holds up despite poor quality earnings. Possibly IBM will return to growth in 2017, or maybe investors are betting on something further out, according to a post on Barron’s.com.

Technical Review

IBM shares trended lower after March 2013’s $215 all-time high but the stock had completed three legs down by early 2016. Resistance in the $165 area is similar to last year. Point and figure technicians have a bullish price objective of $209.  (Chart courtesy of StockCharts.com)

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Summary

IBM has only missed earnings expectations one time out of the last twelve 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. Three of the past four quarters had an average beat of 4c and one quarter beat by 26c. Estimize consensus for Non-GAAP EPS of $4.91 on revenue of $21.644 bln compares to analyst consensus of $4.89 on revenue of $21.71 bln. Gross margin in Q4 tends to increase from Q3.

 

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