Event: IBM reports Q2 results after the close tonight. The options market is implying about a 3.5% one day move which is rich to the 2.9% 4 qtr avg one day move and the 3.1% eight quarter avg.
Price Action / Technicals: surprisingly, IBM is up 8% on the year, with most of the gains coming in the last couple weeks.
The one year chart below shows the stock’s re-test of the early May highs, and obvious technical resistance at $180, which would be a gap fill from the disappointing Q3 results in October:
$160 on the downside appears to be healthy near term support.
Valuation / Fundamentals: Trading at 10.3x trailing earnings, the stock appears cheap, just recently off of a 10 year low. For years IBM has been actively managing earnings, spending the lion’s share of cash flow on share buybacks. Back in January, when they slashed their 2015 earnings outlook, they suggested that they would scale back repurchases in 2015, per Bloomberg:
International Business Machines Corp. has about $6.3 billion remaining in its share repurchase authorization, and that represents the majority of the funds that will be spent on buybacks in 2015, Chief Financial Officer Martin Schroeter said on the Jan. 20 earnings conference call. That’s less than half the $13.7 billion spent to buy back shares last year.
Is the stock’s bounce of late related to Intel’s commentary last week about their data-center business, that grew 10% in the quarter? There is one INTC analyst who does not think this relative strength will hold, per Barron’s:
But Stacy Rasgon of Bernstein Research, who had prominently downgraded Intel shares to Underperform the day before the report, reiterates that rating in his follow-up note, writing that that data center results were in fact “weak.”
Under the headline, “Only the ugly rabbits are left in this hat,” Rasgon writes that “Data Center outlook for the back half appears hugely optimistic, calling for the strongest 2H we’ve ever seen even as upside drivers are annualized and enterprise remains weak.”
My View: expectations are low, despite the stock’s recent bounce. Consensus expects 2015 to be down 10% year over year, down more than 20% from their peak of $107 billion in 2011 and at their lowest levels in more than a decade. We know that management is very focused on a turnaround for the business, independent of secular shifts and I suspect a combination of lower costs, lower buybacks and any uptick in services and SaaS sales will be met with enthusiasm. That said, IBM’s more than 60% revenue exposure outside of the U.S. makes it fairly clear that enterprise spending is weak, and emerging markets are spotty.
Options prices look fairly cheap, with 30 day at the money IV at about 21, which will be on its way back to the mid teens post earnings:
For those looking to define their risk into earnings, and have directional bias with the stock at $172.75, the August 172.50 calls offered at $4.20 and the August 172.50 puts offered at $4.80 look like decent defined risk ways to express a view. The premium risk on either of those could be reduced by selling a 10 dollar away strike with the 162.50 puts about 1.45 and the 182.50 calls about .95.