Cheat Sheet – $IBM Q3 Earnings

by Dan October 16, 2013 10:28 am • Commentary

Event:  IBM reports its Q3 earnings today after the close.  The options market is implying about a 3.75% one day move, which is above the 4 qtr avg of about 4.75% and the 8 qtr avg of about 4.5%.

Sentiment:  Wall Street analysts are far from positive on the stock, with 13 Buys, 16 Holds and 2 Sells, though the average 12 month price target is optimistic, up around $215.  IBM is one of the worst performing mega-cap stocks in the U.S. over the last 2 years, a period in which it’s essentially flat.

Options Open Interest:  Open interest is skewed to calls over puts by a ratio of 1.15 to 1.  Recent options activity has also been about evenly split, with the one month ratio around 1.05.  The 190 strike calls and puts in October have more than 10k of open interest.  The Nov 180 puts also have more than 10k of open interest.

Price Action / Technicals:  IBM’s relative weakness since late 2011 stands in stark contrast to its leadership position in the first 2 years of this bull market.  The broken uptrend has resulted in consolidation, however, not a major pullback:  


[caption id="attachment_31327" align="alignnone" width="600"]IBM weekly, Courtesy of Bloomberg IBM weekly, Courtesy of Bloomberg[/caption]

In the spring of 2013, IBM made a minor new high, but saw a nasty selloff in April after poor earnings.  The stock has made subsequent lower lows and lower highs ever since.  The 180 level is crucial long-term support, which the stock briefly breached last week, before quickly snapping back higher.

Volatility:  IBM had a big move on April earnings (-8%), so the options market has increased its move expectations before July earnings, and once again now before October earnings:

[caption id="attachment_31335" align="alignnone" width="600"]30 day implied vol (red) vs. 30 day realized vol (blue) in IBM, Courtesy of LiveVolPro 30 day implied vol (red) vs. 30 day realized vol (blue) in IBM, Courtesy of LiveVolPro[/caption]

Funnily enough, in July, the stock hardly moved after earnings, even with the higher expectations.  This time around, realized vol is quite low, but implied vol is higher than the Jan and April earnings reports, a lingering effect of the big April move.

Our View:  Dan has traded IBM well over the past couple months.  Here is what he said in his original post in September:

For the better part of 2013, large cap tech, particularly those companies with large (~50%) revenue exposure outside the U.S. and to businesses have under-performed the broad market (see IBM, EMC & ORCL).  While these stocks are relatively cheap on a valuation basis, they are expected to get much of their future growth from emerging markets, which until recently have shown little evidence of a pick up in economic growth. Some of the recent manufacturing data-points in Europe and in China speak to stabilization, which could be all that some active money managers need to see in their desperate chase for performance.  If the long period of U.S. equity out-performance to the rest of world is coming to and end, then we will likely begin to see flows in that direction prior to anyone ringing the bell!

Then early last week, he put on another bullish IBM trade, this time more based on the technicals:

So here is the thing, I have no confidence that IBM is going to beat or even meet their prior guidance, but one thing has been certain in this bull run, pressing oversold stocks at inflection points has not been a winning strategy.

Given the weakness we saw last month in Accenture’s earnings, and the lack of optimism from INTC, we don’t expect fireworks from IBM this quarter.  But the 178-180 area is huge support.  As we know, support has tended to hold in a market like this.