After 22 consecutive quarters of year-over-year drops, IBM sales expected to gain
Software and cloud growth are expected to be key in turning around years of revenue declines at International Business Machines Corp. when Big Blue reports earnings Thursday.
IBM is scheduled to report fourth-quarter results after the closing bell on Thursday, the first with recently installed Chief Financial Officer James Kavanaugh. Over the quarter, analysts have become more optimistic about IBM, as they see the Dow Jones Industrial Average DJIA, -0.37% component beginning to turn the corner into a stronger position in software and cloud services from its mainframe roots.
That confidence has led analysts to predict that IBM revenue will gain more than 1% from the same quarter a year ago, which would be a significant accomplishment for IBM. The company has posted year-over-year revenue declines for 22 consecutive quarters, or 5½ years.
The holiday season wasn’t perfect for IBM, as its servers were cited by analysts as being the cause behind credit-card problems at Macy’s Inc. M, +1.37% on Black Friday. IBM added $3 billion to its stock buyback program back in October.
Earnings: Of the 21 analysts surveyed by FactSet, IBM is expected to report adjusted consensus earnings of $5.17 a share, a 3.2% rise from the year-ago period, and unchanged from what analysts were expecting at the beginning of the fourth quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for an adjusted earnings consensus of $5.19 a share.
Revenue: Of the 18 analysts surveyed by FactSet, IBM is forecast to report revenue of $22.04 billion, for an expected 1.2% gain from the year-ago period, and slightly higher than the $21.83 billion forecast at the beginning of the fourth quarter. Estimize expects revenue of $21.96 billion.
Analysts surveyed by FactSet expect a 2.8% gain in cognitive solutions revenue to $5.45 billion, as a well as a 1% gain to $4.1 billion from global business services, a 1.7% decrease to $9.15 billion in revenue from technology services and cloud platforms, and a nearly 12% gain to $2.82 billion from systems revenue.
Stock movement: IBM shares are already up nearly 10% in January. That follows a 7.6% decline over 2017, compared with a 25% gain in the Dow and a 19% gain in the S&P 500 index SPX, -0.16%
What analysts are saying: On Wednesday, Barclays analyst Mark Moskowitz upgraded IBM to overweight from underweight and raised his price target to $192 from $133, stating that the worst could be over for the company as strategic revenue surpasses legacy revenue and turns around several quarters of revenue declines.
“We think that IBM could emerge as the next important cloud vendor after Amazon and Azure over time as customers seek a multi-cloud strategy to avoid vendor lock-in or technology complacency,” Moskowitz said.
“IBM’s initiatives with both blockchain and analytics could help the company become a more competitive vendor for certain cloud workloads,” noted Moskowitz.
Also, IBM stands to benefit from the discovery of recent chip security flaws, the Barclays analyst said.
“Meltdown only impacts Intel processors, and the patch to fix the flaw could result in performance degradation of over 30% in some environments. The resulting performance differential could lead to new processor considerations for customers, potentially lifting both IBM market share and revenue.”
Bernstein analyst Toni Sacconaghi, who has a market perform and a $150 price target on IBM, expects revenue to beat the consensus, with a notable tailwind from currencies.
“We believe the most important metric for investors to focus on this quarter is software growth—continued strength following last quarter would be encouraging, while a reversal would undermine the bull thesis that IBM is inflecting,” Sacconaghi said. He continued:
Additionally, we encourage investors to monitor: 1) overall revenue growth on an organic and constant currency basis (we forecast – 0.9%); 2) growth of strategic imperatives (we estimate 8%); 3) gross and PTI margins; and 4) services signings (we forecast $16.8B) and ending backlog growth (-1%).
RBC Capital’s Amit Daryanani, who recently upgraded IBM to an outperform rating and a $183 price target, sees IBM benefiting from improved IT spending and a favorable currencies environment. He said:
From a fundamental performance perspective, we think the focus will be on: 1) performance of IBM’s Strategic Imperatives, 2) continued stabilization of gross margins, 3) potential for changes to tax rate impacting EPS or FCF. We remain positive on the company’s gross margin stability and revenue growth prospects in 2018 driven by improved macro environment, f/x, and margin stability.
Of the 25 analysts who cover IBM, eight have overweight or buy ratings on the stock, 15 have hold ratings, and two have sell ratings, along with an average price target of $166.84, about 1% below its current trading price.
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