$IBM Q4 Earnings Preview

by Dan January 22, 2013 11:47 am • Commentary

Event: IBM reports their Q4 earnings this evening after the close. The options market is implying about a 3.3% move vs the 4 qtr avg move of about 4.15%.  

Sentiment:  Wall Street analysts remain fairly mixed on the stock with 15 Buys, 17 Holds and 1 Sell ratings, with an average 12 month price target of ~$222.  Just last week JPM lowered their rating and estimates on the stock, excerpt from note to clients dated Jan 14th, 2013:

We are downgrading IBM to Neutral from Overweight and lowering our Dec-13 price target to $197, versus $215 previously. With IBM, we are concerned that investors could become less interested in the stock, given the company’s limited upside potential and muted revenue growth profile at a time when broader tech end markets could be bottoming.

– IBM’s revenue growth profile could trail global GDP and IT spending trajectories.

-IBM’s above-market growth in software could start to fade.

– IBM’s software and mainframe businesses may not exhibit the typical 4Q lift or new product cycle thrust as has been the case historically.

-IBM services business could grind to almost no growth in 2013.

Fundamentals / Valuation:  JPM’s downgrade of the stock was largely predicated on what they are calling a “growth gap”.  Wall Street analysts expect the company to grow sales only 2% a year for the next 2 years after seeing an expected 2% sales decline in 2012, marking the first year over year sales decline since 2005.  Despite their sales woes, IBM continues to manage earnings well in a tough environment, with expected yoy growth of 13% in 2012 with expected growth of 10% for the next 2 years.  The company continues to cut costs, buys back a ton of stock (the company expects to buy $50 billion of stock back btwn now and the end of 2015-from 2011 annual report here page 11) and makes acquisitions in higher growing areas like software and services.  So the company returns a ton of cash to shareholders (more than 50% if their current market cap since 2000 through buybacks and dividends), but have little prospects for growing sales.  The dividend yield on the stock is below that of the U.S. 10 year treasury note, which is now less than AAPL’s.  So despite the fundamentals looking fair at best, and the company’s inclination to manage earnings,  the valuation reflects this trading below a market multiple at 11.7x 2013 and and 10.7x 201e estimates.

Price Action / Technicals:  Since making a new all time high back in October, and capping a 200% rally off of the 2009 lows, IBM has since massively under-performed the SPX which is up almost 2.5% since the end of Q3, while IBM is down about 6.5% in that time period.

The year chart below shows the fairly important support levels and the uptrend line that the stock appears too be managing between.  Last quarters earnings miss, clearly broke the momentum of the 4 year uptrend, and a second consecutive earnings miss could signal support becoming resistance.  That being said $185 should serve as the next line of support on the downside.

[caption id="attachment_21793" align="aligncenter" width="490"]IBM 2 year chart from Bloomberg IBM 2 year chart from Bloomberg[/caption]

Vol Snapshot: The at the money straddle in the weeklies is about $6.25. That is 41 vol. The February regulars are about 20 volatility. The average vol across all months is just above 20 which is just barely higher than its historical average. So vol isn’t that expensive in the out months, but has a steep curve between the weeklies and the regulars.

[caption id="attachment_21788" align="aligncenter" width="657"]Screen Shot 2013-01-22 at 7.55.45 AM 2 year IV30 (red) vs HV30 (blue) from Livevol Pro[/caption]

MY VIEW:  To date in this earnings cycle there is little take away from competitors, supply chain or  customers to get a solid fundamental read through for IBM.  Looking at the options and the technical set up there does not appear to be anything that sticks out like a sore thumb. While the move may appear cheap to the last 4 quarters, the weekly options do not exactly look cheap.  If we are to play it would likely be to sell Jan25th at our about 4% and buy the Feb.  We will update any views prior to today’s close.


By Beth Mellor
Jan. 22 (Bloomberg) — International Business Machines
scheduled to report 4Q results post-market today.

* 4Q adj. EPS est. $5.25 (range $5.15-$5.32)
* 4Q rev. est. $29.08b (range $28.33b-$29.66b)
* 4Q gross margin est. 51.4% (range 50.8%-51.8%)
* FY2013 adj. EPS est. $16.64 (range $16.21-$17.09)

* 2013 EPS guidance; IBM well-positioned to guide 2013 EPS to  at least $16.50, RBC (sector perform) says; co. also likely to reiterate 2015 EPS view of $20, Sterne Agee (buy) says
* IBM may give “conservative” 2013 EPS guidance of ~$16.65  given ongoing macroeconomics headwinds: Barclays (overweight)
* Server and storage hardware (in particular x86 servers), infrastructure software, services bookings may all have downside risk as deals may have been pushed from 4Q into 1H: Barclays
* In services, IBM may have gained share from Accenture, SAP  and Hewlett-Packard, Sterne Agee says; also expects to see hardware segment recovery driven by Power 7+ processors
* Also watch for commentary on call regarding IBM’s intended pace of software acquisitions in 2013 and plans for Texas  Memory Systems (acquired by IBM in Aug.): Barclays

* IBM has 15 buy ratings, 17 holds, 1 sell, avg. PT $223:
Bloomberg data
* IBM has beaten adj. EPS 8 of last 8 qtrs; sales have missed
5 of last 8 qtrs; shrs have fallen day after 4 of last 8
* IBM down 7.5% since reporting 3Q results Oct. 16 vs SPX up
1.9% over same period

* IBM reported prev. four qtrs 4:03pm-4:11pm
* Call 4:30pm see http://www.ibm.com/investor/events/