International Business Machines Corp. (
IBM
)
is all set to report its fourth quarter and full year 2011 results
on January 19, 2012, after the market closes. We expect IBM to
report modest results due to sluggish IT spending partially offset
by robust growth from its key growth initiatives.
We note that IBM has posted an average earnings surprise of
1.86% in the trailing four quarters, implying that it has outdone
the Zacks Consensus Estimate by the same magnitude for the last
four quarters. We do not expect any major changes in the earnings
trend pattern for the current quarter.
Prior Quarter Recap
IBM reported mixed third quarter 2011 results with earnings per
share (
EPS
) surpassing the Zacks Consensus Estimate by 6 cents (2.0%) but
revenues falling shy of the estimate of $26.24 billion.
IBM posted non-GAAP EPS of $3.28 in the third quarter, up 15.1%
on a year-over-year basis and representing double-digit growth in
17 of the last 19 quarters. The significant upside was
primarily driven by solid revenue growth (22 cents), margin growth
(3 cents) and share repurchases (18 cents).
Total revenue increased 7.8% year over year (3.0% adjusted for
currency) to $26.16 billion. The upside was driven by continued
strength across growth markets, which was 23.0% of IBM's total
geographic revenue in the third quarter. Strong performance from
the growth markets fully offset the sluggish performance in the
major markets (up 5.0%, flat at constant currency) during the third
quarter.
IBM raised its fiscal 2011 operating EPS estimate to at least
$13.35 from its previous guidance of at least $13.25. GAAP EPS
guidance was also raised to $12.95 from the earlier projection of
at least $12.87.
For further details please see
Mixed 3Q for IBM
.
Estimate Revision Trend
Currently, the Zacks Consensus Estimate for the fourth quarter
is pegged at $4.62, up 10.5% from $4.18 reported in the year-ago
quarter. This is based on an estimated revenue growth of 2.5% to
$29.74 billion.
Analysts seem to be divided in their opinions for the current
quarter. Of the 19 analysts covering IBM, two raised their
estimates in the last 30 days, while two lowered their estimates
during the same period. However, the Zacks Consensus estimate went
down a penny over the last 30 days, implying a slightly negative
bias.
Corrections were also seen in the fiscal 2011 estimates, with
three analysts lowering their earnings forecast and only one
analyst raising the estimate in the last 30 days. However, this did
not bring about any significant change in the Zacks Consensus
Estimate, which currently stands at $13.37, at least 2 cents above
management's non-GAAP guidance.
Conclusion
We believe that IBM remains well positioned for long-term growth
based on its four key growth initiatives: smarter planet, growth
markets, business analytics and cloud computing, which are expected
to deliver at least $50 billion in revenues by fiscal 2015. We
believe that IBM's strong product pipeline, expansion into emerging
markets and continuous acquisitions will help it to achieve this
target going forward.
We also believe that a strong patent portfolio and accretive
acquisitions will provide IBM a competitive edge over other
prominent vendors, including
Oracle Corp. (
ORCL
)
,
Hewlett-Packard Co. (
HPQ
)
,
Microsoft Corp (
MSFT
)
and
EMC Corp (
EMC
)
.
It is true that IBM has been one of the most consistent
performers over the last one year, outperforming the S&P 500 by
approximately 19.0%. However, modestly slower IT growth, primarily
due to volatile macroeconomic conditions; a high level of
unemployment; continuing European debt crisis and unfavorable
foreign exchange fluctuations are expected to negatively impact the
forthcoming quarters. Valuation also looks rich, in our view.
We have a long-term Neutral recommendation on IBM and are
optimistic about its strong fundamentals and robust growth
prospects going forward. Currently, IBM has a Zacks #4 Rank, which
translates into a short-term Sell rating.
EMC CORP -MASS (
EMC
): Free Stock Analysis Report
HEWLETT PACKARD (
HPQ
): Free Stock Analysis Report
INTL BUS MACH (
IBM
): Free Stock Analysis Report
MICROSOFT CORP (
MSFT
): Free Stock Analysis Report
ORACLE CORP (ORCL): Free Stock Analysis Report
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