IBM Earnings Preview: The Song Remains The Same - Still No Revenue Growth

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About: International Business Machines Corporation (IBM)
by: Brian Gilmartin, CFA
Summary

2020 EPS and revenue consensus will be key with the Red Hat acquisition.

To get interested in the stock, both the 2020 revenue estimate should start to increase and the stock needs to recover to $132 and then $150.

One plus is the sentiment around the name is beyond bad.

The nature of IBM is that it goes through these long cycle transitions, i.e., like from 1987 to the mid-1990s.

To own IBM here, you need to be playing a longer-than-usual game.

The technology giant IBM (IBM) is scheduled to report Q4 '18 financial results after the bell on Tuesday, January 22nd, 2019 (unconfirmed, and per Briefing.com), but the fact is the story has been the same now for 3-5 years running for Big Blue.

The stock peaked in early 2013 at $215 per share (or around there anyway) and bottomed in Q1 '16 near $116.90 to $118 and again has bounced around close to these multi-year lows since, thus Big Blue has fallen 45% since its 2013 peak, during a period when the S&P 500 has risen over 60%.

The Red Hat (NYSE:RHT) acquisition for $190 per share, all-cash (announced in late October 2018) which is expected to close in the latter half of 2019, is expected to put IBM firmly in the hybrid cloud, and allow Big Blue access to 80% of the cloud IBM can't yet get to (in my own simplistic terms). As someone challenged by pumping gas or making toast, the technical aspects of technology are well beyond my understanding and thus all I really do is watch numbers and consensus estimates to tell me what I need to know.

And watching IBM's consensus revenue and EPS estimates, so far little has changed for 2019 or 2020:

Q4 '18 est Q3 '18 Q2 '18 Q1 '18
2020 EPS est $14.38 $14.41 $14.45 $14.62
2019 EPS est $13.91 $13.93 $13.04 $14.12
2018 EPS est $13.80 $13.80 $13.80 $13.80
2020 est EPS gro 3% 3% 3% 4%
2019 est EPS gro 1% 1% 2% 2%
2018 est EPS gro 0% 0% 0% 0%
2020 PE 8x 8x 10x 10x
2019 PE 8x 8x 10x 11x
2018 PE 8x 8x 10x 11x
2020 rev est ($'s bl's) $79.9 $79.9 $80.3 $80.9
2019 rev est $79.3 $79.2 $80.0 $80.0
2018 rev est $79.7 $79.7 $80.3 $80.3
2020 est rev gro rt 1% 0% 0% 1%
2019 est rev gro rt 0% -1% 0% 0%
2018 est rev gro rt 1% 1% 1% 1%

Source: Consensus estimates from IBES for Refinitiv as of 1/6/2019

Note the complete absence of revenue growth over the next 24 months. That's not good with the Red Hat acquisition, although analyst models may not incorporate the acquisition yet until there is a higher probability that it will close.

The chart is scary:

Looking at the monthly chart of IBM, the stock is barely hanging on to its Q1 '16 lows when Katy Huberty of Morgan Stanley upgraded the stock, and yet two years later, fundamentally nothing has changed.

The 200-month moving average sits at $132 and the trendline off the 2013 highs sits near $150, so the stock needs to eclipse those levels to even begin to think that there is a longer-term recovery at work.

Summary/conclusion: The nature of investing is that longer-term investors should take "non-consensus" views to outperform the S&P 500. In fact, I talked about this in a blog post after listening to Professor Joel Greenblatt speak in Chicago in December 2018.

To buy IBM here for clients wouldn't even be a strict value investment since Big Blue's PE and cash flow valuation are elevated relative to the long-term growth rate, but it would definitely be an out-of-favor purchase that would certainly meet the sentiment criteria.

The point to Seeking Alpha readers is you don't have to be a hero: even if you are a little late on the stock, and bought it well off the bottom, you will still likely buy IBM well short of its all-time highs and thus have plenty of time to generate "alpha" for your portfolio.

The nature of IBM over the years is that it leads and lags for years at a time. The last cycle that ended in 2013 began with the secular growth of the Cloud and Red Hat will likely help that, but besides the 5% market share position in Data Services (per Morningstar), IBM needs this Cloud initiative to work, especially after the Strategic Imperatives initiative didn't.

The first chunk was sold of IBM after the 2013 peak, between $175-$180 and then all of the stock was sold around $155. The first price point where the stock will show that growth lies ahead will be trading above the 200-month moving average near $132, but the stock will stay above that price level too.

The slow drip lower in the EPS and revenue consensus estimates tells me it still might be too early to own.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.