International Business Machines (IBM) will report 2nd quarter, 2012 earnings after the bell on Wednesday, July 18th. Analyst consensus are expecting $3.42 in earnings per share on $26.275 billion of revenue, for expected year-over-year growth of +11% and -1%, respectively.
IBM, like many multinationals, will see unfavorable currency effects this quarter, while the key to the quarter seems to be margins and the software business. This is why earnings per share is still expected to grow low-double-digits at 11%. Current full-year consensus EPS is $15.06, in line with management's guidance of $15.00. This results in expected 12% earnings in 2012 on the current consensus of $107.5 billion in revenue, which is 1% growth.
Since last quarter's report, earnings estimates have been trimmed from $3.44 to $3.42 (very little) while the consensus revenue estimate has been cut by about $290 million, from $26.521 to $26.275 billion.
Two companies that are followed closely by analysts to get an early read on IBM's quarter are Accenture (ACN) and Oracle (ORCL), both of which reported late June. Oracle's quarter - a good look into enterprise software - was pretty strong, and Accenture ( services / consulting business) saw mid-single digit revenue growth of 6% and EPS growth of 11%.
With IBM's Global Business and Technology Services being 60% of Big Blue's revenue, and Software 23% - 25%, the early read into the competitors doesn't cause too much alarm.
However, the detractors have come out on IBM this quarter, as the stock has fallen from $205 as of the April 2012 earnings report to the low $180's today. A big part of the worry is IBM's mantra about earning $20 per share by 2015, what with the stock trading close to $200 per share already, and with the assumption that Big Blue is a mid-to-high single digit organic grower, the stock could be fully valued here.
At 2012's $15 EPS estimate and the stock at $185, IBM is trading at 12(x) this year's expected earnings and 11(x) 2013's expected EPS of $16.60 with expected growth this year and next of 11% and 10%.
The big plus (in our eyes) to IBM's valuation is the prodigious cash-flow generation. Big Blue will generate $20 - $25 billion in cash-flow from operations (CFO) by 2015, and with only $4 - $5 billion in capex, there will be sizable share repurchases, as well as more acquisitions, not to mention that at $205 per share, IBM is trading at 11(x) price-to-cash-flow, i.e. not screamingly cheap but not like Nike's (NKE) 25(x) cash-flow valuation when it reported in June.
When looking at our internal spreadsheet on IBM, and to give you some idea of the share buybacks, IBM (on a year-over-year basis) has reduced average shares outstanding every quarter since September, 2010 by 4% to 7%.
To look a little further back, IBM has reduced its "diluted shares outstanding" from 1.338 billion as of September '09 to 1.159 billion as of March 31, 2012 or a 13.5% reduction in shares outstanding, in less than 3 years. Even in a bad market, that helps put a floor under earnings growth and the share price.
We aren't buying IBM in front of Wednesday's nights earnings report, but will wait to see the results, and technically, like the stock better under $180 to $175.
Disclosure: I am long IBM.
Additional disclosure: Long smaller positions in Oracle (ORCL) and Nike too.
