International Business Machines Corp. (IBM) 3Q17 Earnings Preview


IBM 3Q17 earnings are set for release tonight after closing bell, and Wall Street is expecting adjusted earnings of $3.28 per share on $18.57 billion in sales. In last year’s third quarter, the company reported $3.29 per share in adjusted earnings on $19.23 billion in revenue.

It should be noted that IBM’s revenues have been declining steadily quarter after quarter, for several years as it transitions from its older to its newer “imperatives.” The company probably didn’t hit its revenue floor during the third quarter, but investors have been watching for a reversal for a long time. Roughly half of IBM’s revenues in the second quarter came from its newer imperatives, according to UBS, but there is still more to be done in this area.

Charlie Munger on Discount Rates and Opportunity Cost

Discounting future cash flows is one of the most frequently used methods of business valuation. It's also the preferred method of Warren Buffett and Charlie Munger. If you’re looking for value stocks, and exclusive access to value-focused hedge fund managers, check out Hidden Value Stocks. While he's never laid out his exact valuation process, Buffett Read More

A related issue in the IBM 3Q17 earnings report will be the quality of the company’s earnings, as in which businesses its profits primarily come from. Areas such as software licensing are seen as poor quality because software is essentially an aging business. Most analysts see the company’s software licensing deals as one-time things rather than recurring, which is obviously not what Wall Street wants. Recurring is the new aim in tech earnings these days.

KeyBanc analyst Arvind Ramnani said leading up to the IBM 3Q17 earnings release that he sees the setup as being a mixed bag. The company’s first-half performance was “lackluster,” he explained in a note dated Oct. 15, so investors want to see a strong finish to the year.

He believes that if IBM is able to deliver strong results for the last six months of the year, its stock will probably climb. However, he adds that IBM stock has historically underperformed following its earnings prints. The stock lagged the S&P 500 by 7.7% a week after the company’s first-quarter report and 5.8% a week after its second-quarter earnings release. IBM trails the index by more than 25% year to date.

Despite this weak performance, Ramnani believes investors might consider owning the stock leading up to the IBM 3Q17 earnings release tonight, although he has a Sector Weight rating on it. The reason he feels investors might consider owning the stock heading into the print is because expectations have been slashed due the first-half weakness. He also notes that IBM is an attractive dividend stock with a roughly 4% yield.

Ahead of the IBM 3Q17 earnings release tonight, the company’s stock ticked lower by as much as 0.2% to $146.53 during regular trading hours.