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IBM's Q3 Earnings Around the Corner: What's in the Cards?

International Business Machines Corp.IBM is set to report third-quarter 2015 results on Oct 19, after the market closes. Last quarter, it posted a positive earnings surprise of 1.05%. However, over the past four quarters, the company posted an average negative earnings surprise of 0.88%. Let's see how things are shaping up for this announcement.

Factors at Play

In the last reported quarter, while IBM surpassed expectations for earnings, its revenues lagged estimates. In fact, revenues declined on a year-over-year basis as well.

We believe that revenues are likely to be affected in the near term as the company is currently transitioning to higher-growth markets that are not yielding enough to offset declines in traditional segments.

Also, intensifying competition in the industry is a major headwind. Further, sluggish IT spending particularly on on-premise and data center hardware along with foreign exchange volatility remain added concerns.

Nevertheless, IBM's growth initiatives, including its Big Data & business analytics, cloud computing, mobile and social business are expected to drive growth. Also, the company is expected to benefit from its ongoing innovation and its array of interesting patents.

In addition, IBM's policy of making strategic acquisitions (over 150 companies since 2000) will lead to incremental revenues, strengthening its technology leadership and resulting in a more favorable mix of business. The acquisitions have also increased its scale of operations globally. Some of IBM's recent acquisitions include Merge Healthcare, StrongLoop, Meteorix LLC and Cleversafe Inc.

Earnings Whispers

Our proven model does not conclusively show that IBM is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: IBM has an Earnings ESP of -1.50%. This is because the Most Accurate estimate stands at $3.28, while the Zacks Consensus Estimate is pegged higher at $3.33.

Zacks Rank: Though IBM's Zacks Rank #3 (Hold) increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some stocks worth considering that, as per our model, have the right combination of elements to post an earnings beat this quarter:

Fiserv, Inc. FISV with Earnings ESP of +3.09% and a Zacks Rank #2 (Buy).

Apple Inc. AAPL with Earnings ESP of +0.54% and a Zacks Rank #3

Amazon.com, Inc. AMZN with Earnings ESP of +354.55% and a Zacks Rank #3

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FISERV INC (FISV): Free Stock Analysis Report

AMAZON.COM INC (AMZN): Free Stock Analysis Report

APPLE INC (AAPL): Free Stock Analysis Report

INTL BUS MACH (IBM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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