With its 5.2% annual yield, dividend investors have long viewed International Business Machines (IBM) as a great income-generating stock. But aside from its “defensive” feature, which shields investors from market downturns, IBM is now developing a “growth quality” as well, thanks to its spinoff of Kyndryl.
“The separation of Kyndryl is one of many actions we are taking to sharpen our focus on hybrid cloud and AI, leverage a portfolio clearly focused on technology and consulting, and achieve our growth objectives,” said CEO Arvind Krishna in the press release announcing the split. However, since the initial uptick in the share price, IBM has languished, falling 6% and 12% in the respective three months and six months. With the stock now down 5.3% year-to-date, can the company say anything to get investors excited again?
That answer may become clearer after the company provides its first quarter fiscal 2022 earnings results Tuesday after the closing bell. The tech giant has struggled to grow revenues over the past decade and has not benefited in the massive economic expansion that saw cloud leaders such as Amazon (AMZN) and Microsoft (MSFT) produce double-digit revenue gains. But as it transitions away from its legacy businesses, IBM’s turnaround has seemingly begun. The company’s cloud ambitions have shown some promise in recent quarters thanks to the Red Hat acquisition.
Citing the quality of IBM’s new leadership, Morgan Stanley Analyst Erik Woodring recently raised his rating on the stock to overweight from equal-weight and inched the price target to $150 per share from $147. It appears the market is giving IBM more credit for the recent traction the company has made towards the cloud. But for the shares to maintain their uptrend, the company on Tuesday will need to demonstrate continued operating leverage and revenue growth acceleration.
For the three-month period that ended in March, Wall Street expects the New York-based company to earn $1.39 per share on revenue of $13.87 billion. This compares to the year-ago quarter when earnings were $1.77 per share on $17.34 billion in revenue. For the full year, ending in December, earnings are projected to rise 24% year-over-year to $9.82 per share, while revenue of $60.68 billion would rise 5.8% year-over-year.
The company is now forecasted to grow annual revenues by high single digits over the next five years. “With the spin-out of Kyndryl and the acquisition of Red Hat, you’re seeing that just under half of our portfolio is software, a little under one-third of it is consulting,” said Krishna in his presentation. However, enterprise IT spending and unpredictable corporate actions will be the main factors that will impact IBM's stock price outlook this year.
In the fourth quarter IBM beat on both the top and bottom lines, reporting revenue of $15.7 billion which rose 6.5% year-over-year, topping estimates by almost 5%. The main driver of the quarter was IBM’s consulting business which saw a better-than 16% year-over-year growth to $4.7 billion. The management noted that "clients are accelerating their business transformations" and "are turning to IBM Consulting" because of its "deep client, industry and technical expertise."
Q4 EPS came to $3.35, topping estimates by 2%. The company attributed the profitability improvement to "the separation of our managed infrastructure services business, Kyndryl.” In other words, the turnaround is underway. Following the spinoff, IBM has structured a more simplified business with segments including Consulting, Infrastructure and Software. The latter includes services from Red Hat and cloud. On Tuesday, investors will want to see whether IBM can build on this success.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
Read Richard's Bio