IBM Earnings Preview: Revenue Growth Needed - Cash Flow Is A Monster

| About: International Business (IBM)
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IBM (NYSE:IBM) reports tonight, Tuesday, January 22nd, 2012 after the closing bell.

The stock performed poorly in 2012, returning 6% during the calendar year, (excluding the dividend), despite what will likely be 14% earnings per share growth on a 2% year-over-year decline in revenues.

IBM got pasted after reporting q3 '12 earnings in mid-October, as the stock fell from $210 to high $180's before starting to base.

The one aspect that caught my eye was that 2012 and 2013 earnings per share estimates have remained relatively stable, and have seen little downward pressure, despite the stock action post the October earnings.


'12 eps


'13 eps




'12 rev


'13 rev






current $15.13 $16.63 10% $104.32 $106.48 2.1%
Dec '12 $15.13 $16.64 10% $104.44 $106.72 2.2%
Oct '12 $15.13 $16.64 10% $104.47 $106.79 2.2% 8%
Jul '12 $15.14 $16.68 10% $105.41 $108.36 3% 8%
Apr '12 $15.08 $16.61 10% $108.16 $111.94 3.5% 7%
Jan '12 $14.92 $16.42 10% $108.65 $112.37 3.5% 7%
Oct '11 $14.84 $16.37 10% $110.37 $114.80 4% 6%

* Source: ThomsonReuters data and internal spreadsheet

In the 3rd quarter, 2012, the 2nd quarter in a row where IBM missed on revenues, operating income also fell 5% but the superior cash-flow and free-cash-flow (NYSE:FCF) generation, allows Big Blue some operational weakness, since the share repurchase program allows EPS to keep growing.

Revenue and EPS estimates have been moving in opposite directions: as forward revenue estimates have been revised lower, earnings per share estimates continue higher.

Accenture (NYSE:ACN) and Oracle (NYSE:ORCL) are thought to be two decent leading indicators of IBM's business, and while Oracle's software business has now had two good quarters in a row, (August '12 and Nov '12) ACN was strong in August '12, but weakened in the December '12 quarter. ACN traded down sharply after the December '12 earnings report.

As the above table indicates, if IBM can just meet on the revenue estimates tonight, and maintain their 2013 revenue guidance, then I think the stock will have some upside through the first half of 2013.

Earnings per share growth is not the issue for Big Blue: the share buyback and the prodigious cash-flow generation allows management to meet the earnings per share targets pretty easily.

Current 2013 earnings per share and revenue estimates for Big Blue are for $15.13 and $104.5 billion for expected growth of 0% and 10%.

With Big Blue's longer-term goal of $20 in earnings per share by 2015, I do believe that Street analyst's were expecting more of that $20 EPS goal to be driven by revenue growth. I don't actually think it is a big problem for IBM to meet this $20 EPS goal, since it represents 10% growth per year, most of which can come from the stock repurchase program on its own.

Here is a good article written about IBM's Q4 '12 earnings release, with the primary addition we would make is that 2013 might be more about revenue growth for IBM, than other metrics. (No relation to Brendan.)

To materially drive IBM's share price into 2013, I think Big Blue needs to start growing revenues mid-single digits once again.

Listen for 2013 revenue and margin guidance tonight.

Disclosure: I am long IBM, ORCL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.