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IBM Gears Up for Q1 Earnings: What's in Store this Time?

International Business Machines Corp. IBM is set to report first-quarter 2016 results on Apr 18, after the market closes. Last quarter, it posted a positive earnings surprise of 1.68%. Over the past four quarters, the company has posted an average positive earnings surprise of 1.37%. Let’s see how things are shaping up for this announcement.

Factors at Play

IBM had a tough 2015 given the ongoing and heavily time consuming business model transition to cloud. Further, sluggish IT spending particularly on on-premise and data center hardware along with foreign exchange volatility remain added concerns.

We believe that revenues will continue 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.

Nevertheless, IBM's strategic growth initiatives, including its Big Data & business analytics, cloud computing, mobile and social business are expected to drive growth. In 2015, cloud, analytics, social, mobile and security revenues grew 17% over the last year and represented 35% of total revenue in the year. Cloud revenues grew 43%, business analytics revenues grew 7%, security business revenues increased 5% while mobile business registered a threefold jump. Reportedly, IBM estimates SoftLayer to generate $1 billion in revenues in 2016. SoftLayer is the primary infrastructure of IBM’s cloud operations.

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. This year IBM has made 10 acquisitions so far, which include Bluewolf Group, Resilient Systems, Truven Health Analytics,Optevia and The Weather Company’s B2B, mobile and cloud-based web-properties. Strong cash flow generation is expected to provide the financial flexibility required for strategic investments in the changing business environment. 

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 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: IBM has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $2.07.

Zacks Rank: IBM carries a Zacks Rank #4 (Sell). 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:

Silicon Motion Technology Corp. SIMO with Earnings ESP of +7.27% and a Zacks Rank #1

Verisk Analytics, Inc. VRSK with Earnings ESP of +2.63% and a Zacks Rank #1.

Intel Corporation INTC with Earnings ESP of +4.08% and a Zacks Rank #3

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
INTL BUS MACH (IBM): Free Stock Analysis Report
 
VERISK ANALYTIC (VRSK): Free Stock Analysis Report
 
SILICON MOTION (SIMO): Free Stock Analysis Report
 
INTEL CORP (INTC): Free Stock Analysis Report
 
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