Market Overview

IBM Earnings Preview: Another Revenue Decline Expected

International Business Machines (NYSE: IBM), whose share price pulled back last week from a multiyear high, is scheduled to report its third-quarter 2012 results Tuesday, October 16, after the closing bell. Investors will be looking for the company to get back on the right track after last quarter's revenue drop snapped a string of increases.

Expectations

But analysts on average predict that IBM will report that revenue declined three percent year-over-year to $25.36 billion. Per-share earnings are expected to come to $3.61 for the quarter, up from $3.28 per share in same period of last year. The consensus EPS estimate was $3.62 some 60 days, and estimates now range from $3.51 per share to $3.72 per share. Analysts have underestimated IBM's EPS in the past 10 quarters; the upside surprise was more than 2.5 percent in the past two quarters.

Back in the second quarter, IBM attributed the disappointing revenue results to declining revenue in Europe, the Middle East and Africa and to currency fluctuations. But IBM also raised its full-year EPS guidance. Shares jumped more than three percent following the earnings release.

So far, the full year forecast has EPS more than 11 percent higher year-over-year and revenue down less than two percent.

The Company

International Business Machines is a global information technology products and services provider. It operates in five segments: Global Technology Services; Global Business Services; Software; Systems and Technology; and Global Financing. IBM is a component of both the S&P 500 and the Dow Jones Industrial Average, and it has a market capitalization near $237.5 billion. It was founded in 1910 and is headquartered in Armonk, New York. Virginia Rometty has been the chief executive since January 2012 and chairman since October 1.

Competitors include Hewlett-Packard (NYSE: HPQ), Microsoft (NASDAQ: MSFT) and Oracle (NASDAQ: ORCL). Hewlett-Packard posted a huge net loss in its most recent quarter due to declining PC sales and an acquisition-related charge. Microsoft is scheduled to share its results later this week, but analysts expect to see declines in both EPS and revenue. Oracle met EPS expectations but fell short of the consensus revenue estimate when in posted results back in September.

During the three months that ended in September, IBM won a $1 billion contract with Cemex (NYSE: CX); expanded operations in Turkey, Brazil and Kenya; acquired Texas Memory Systems, Kenexa (NYSE: KNXA) and Butterfly Software; and replaced its own chairman of the board.

Performance

IBM's long-term EPS growth forecast is about 10 percent and its operating margin is higher than the industry average. It has a return on equity of more than 74 percent and a dividend yield of about 1.6 percent. Short interest is less than two percent of the float. Eleven of 27 analysts surveyed by Thomson/First Call who follow the stock recommend buying shares, but none recommend selling. Their mean price target signals less than five percent potential upside.

The stock is up more than 11 percent year to date despite pulling back last week from near a multiyear high. The share price remains well above the 200-day and 50-day moving averages. Over the past six months, the stock has outperformed Hewlett-Packard and Microsoft, but narrowly underperformed the Dow and the S&P 500.

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