Facts to know before you place a bet on it
IBM Zacks.com users have been paying attention to IBM (IBM) as one of their most popular stocks. It might be worthwhile to examine some factors that could affect the stock’s near-term performance.
Over the past month, shares of this technology and consulting company have returned +4.1%, compared to the Zacks S&P 500 composite’s no change. The Zacks Computer – Integrated Systems industry, where IBM is included, lost 2.7% during this time. The question now is, “What’s the stock’s future direction?”
Although media reports or rumors of a significant change in a company’s business prospects often make the stock ‘trending’, and cause an immediate price drop, there are still some basic facts that ultimately determine whether to buy or hold.
Earnings Estimate Revisions
Zacks focuses on the company’s earnings projection and not other things. Because we believe the fair price of a stock is determined by its future earnings stream, this is why we consider it fair.
The stock’s sell-side analysts are responsible for revising earnings estimates to reflect changes in business trends. If earnings estimates for a company go up, its fair value for the stock also goes up. Investors will be more interested in purchasing stock if its fair value is higher than the current price. This drives the stock’s price to rise. Research has demonstrated a strong correlation in the near-term stock market movements to trends in earnings estimate revisions.
For the current quarter, IBM expects to report earnings of $3.57 per Share. This is a +6.6% increase year-over-year. The Zacks Consensus estimate remained the same over the past 30 days.
A consensus earnings estimate for the current fiscal years of $9.12 indicates a year-overyear increase of +15%. This estimate has not changed in the last 30 days.
The consensus earnings estimate for the next fiscal year of $9.69 represents a +6.3% increase over what IBM is expected report last year. The estimate has remained the same over the past month.
Our proprietary stock rating tool, the Zacks Rank, has an impressive track record and is more reliable than any other indicator of a stock’s near-term performance. It effectively harnesses earnings estimate revisions to provide a better indicator of a stock’s near-term price performance. IBM’s Zacks Rank #2 has been given to it due to three factors related earnings estimates: the recent consensus estimate change, and the size of other factors.
Below is a chart that shows the evolution of the forward 12-month consensus EPS estimation for the company.
12 Month EPS
Projectioned Revenue Growth
Although earnings growth is the best indicator of a company’s financial health, it doesn’t mean much if it can’t increase its revenues. It is nearly impossible for a company not to increase its earnings over a long period of time. Knowing the potential revenue growth of a company is essential.
IBM estimates that the current quarter’s consensus sales estimate of $15.49billion will show a year-overyear increase of -7.2%. Estimates for the next and current fiscal years are $59.32billion and $59.9billion, which indicate -16.2% changes and +1% respectively.
Last Reported Results and Surprising History
IBM reported revenue of $14.1 billion for the quarter ended December 31, representing an increase of -19.9% over the previous year. The same period saw EPS of $1.81, compared to $2.52 last year.
The reported revenues are a surprise at +2.72% when compared to the Zacks Consensus Estimate for $13.73 billion. Surprise EPS was +1.69%.
IBM exceeded consensus EPS estimates 3 times over the past 4 quarters. This period saw the company surpass consensus revenue estimates by three times.
Valuation
An investment decision cannot be made without taking into account the stock’s valuation. To predict a stock’s future price performance it is important to establish if its current price accurately represents the intrinsic value the underlying company and the company’s growth prospects.
Comparing the current valuation multiples of a company, such as price/to-earnings(P/E), and price/to-sales/P/S), with its historical values can help determine if its stock is fair valued, overvalued or undervalued. Additionally, it helps to compare the company relative its peers using these parameters, which gives you a good idea of the reasonability for the stock’s stock price.
The Zacks Style Scores system organizes stocks into five categories. A is better than B, B is better that C, and so forth. This helps in determining whether a stock’s value is rightly or incorrectly.
This is a grade of B for IBM, which indicates that the company is trading at an advantage over its peers. Click here for the values of some valuation metrics that have influenced this grade.
Conclusion
This information, along with other Zacks.com data might help you decide whether it’s worth keeping an eye on the IBM market buzz. The Zacks Rank #2 of IBM suggests it may outperform other markets in the near future.
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