By Brendan Gilmartin
IBM Corp. (NYSE:IBM) is slated to report 1Q 2014 earnings after the close of trading on Wednesday, April 16. Results are typically released at approximately 4:05 p.m. EST and will be followed with a conference call at 4:30 p.m. IBM is a member of the Dow Jones Industrial Average, with broad market influence and could impact on the index futures.
Outliers & Strategy
- IBM typically produces a value for the measure Adjusted Earnings Per Share (EPS) and Non-GAAP Earnings Per Share that is comparable to the Street consensus estimate.
- Adjusted/Non-GAAP Earnings Per Share for the seasonally weak first quarter is forecast to come in at $2.54 per share (Source: Yahoo! Finance) with a range of $2.49 - $2.63, down from $3.00 in the prior year.
Other key measures:
- Revenues: The estimate is $22.93 bln (range is: $22.21 bln to $23.19 bln). In recent quarters, IBM has missed on the top line, triggering noticeable declines in both the equity and index futures.
- Gross Margin: This is a key measure for IBM. The current estimate is 47.3% (Source: Zacks Investment Research).
- Adjusted Earnings Per Share Guidance (FY2014): Back in January, IBM said it expects to deliver full-year 2014 GAAP earnings per share of at least $17.00; and operating (non-GAAP) earnings per share of at least $18.00. The current Street estimate is $17.84. A figure of >$18.00 would therefore be seen as a positive signal.
- IBM could see meaningful volatility off the 1Q 2014 earnings release, with the options market currently pricing in a >3.0% move. With the shares up more than 12% since early February, but struggling to overtake the recent resistance near $195, the Street is clearly looking for bottom and top-line results at the high end of the Street estimates with a nudge higher in the 2014 full year outlook. Anything less could be cause for a pullback.
- 04/14: IBM announced new security and disaster recovery services that could make the cloud more attractive to companies that remain skeptical.
- 04/10: Deutsche Bank initiated coverage on IBM with a Hold rating and $200 price target saying "hardware revenue to continue to be challenged, driving overall revenue down modestly in FY-14", according to a post at Benzinga.com.
- 04/09: Stifel Nicolaus reiterated a Buy rating and a $220 price target despite their expectations for an EPS and revenue miss due to their hardware business becoming less of a drag and increased stock buybacks, according to a post on Barron's Blogs.
- 03/27: According to an interview on CNBC, technology analyst Dan Niles of AlphaOne Capital said he is short shares of IBM, based on the competitive threat from cloud-computing and exposure to the global economy. Mr. Niles also cited IBM's recently disappointing track record on top-line growth.
IBM's recent strength follows a year of relative underperformance when the overall market rose 20% and technology acted as a leader. As recently as February, IBM had declined 15% during a market uptrend suggesting an over 30% underperformance. While this is partly due to outperformance in previous years, even moving back up to previous highs would get the stock to around $205. Recent support is $193 and below that has the moving averages at $185. Upside potential is over 20% to catch back up to the sector.
(Chart courtesy of StockCharts.com, click to enlarge)
IBM have been rallying in recent weeks, despite concerns over a softer IT refresh cycle, competition in cloud-computing, and speculation the tech giant faces slower growth in the mainframe business. But with the company buying back shares, creating value-added services, and trading at a modest valuation, IBM could make a run back toward the $200 level so long as top-line growth and the outlook for 2014 top consensus views.
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