Earnings Preview: IBM to Report on Thursday, Strategic Imperatives in Focus

International Business Machines Corp. IBM, aka Big Blue, reports fourth-quarter earnings after the closing bell on Thursday, Jan. 18. Like several of the legacy tech companies have been doing in recent years, IBM has been transitioning to a cloud-based world by focusing on what management refers to as its strategic imperatives: cloud, analytics, mobile and security.

In the third quarter, IBM reported revenue from its strategic imperatives increased 11% year-over-year to $8.8 billion, excluding the impacts of foreign exchange. Cloud revenue grew 20% year-over-year to $4.1 billion, analytics revenue was up 5%, mobile revenue increased 7% and security revenue increased 51%.

Despite the growth in those segments, total revenue was essentially flat to last year at $19.2 billion, which some analysts saw as a sign that revenue was starting to stabilize after a 12% revenue decline in 2015 and another 2.2% drop in 2016. The day after it reported Q3 results, shares gapped up, ending the day at $159.53, up $11.89 from the prior day’s close. 

For Q4, IBM is expected to report adjusted earnings per share (EPS) of $5.17, up from $5.01 in the prior-year period, on revenue of $21.96 billion, according to third-party consensus analyst estimates. The company has reported revenue declines for 22 consecutive quarters, but it looks like analysts are finally expecting that trend to reverse, with estimates calling for just shy of a 1% year-over-year increase.

Analysts are again, for the most part, expecting high-single-digit to low-double-digit growth in strategic imperatives. IBM also recently launched its new z14 mainframe, which CFRA analysts think will add momentum to the 10% growth in IBM’s systems segment in Q3, which had been declining in previous quarters. 

IBM STOCK PERFORMANCE. After its increase in the first two weeks of 2018, IBM is a little below where it started 2017. Shares moved quite a bit over the course of last year, sliding to hit a low of $139.13 in mid-August after peaking at $182.79 in mid-February. Shares have since bounced back from 2017 lows and have been trading around the $160 range. The bottom chart shows the implied volatility for IBM. Chart source: thinkorswim^® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

IBM Options Trading Activity

Around IBM’s upcoming earnings release, options traders have priced in about a 4% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. As of this morning, implied volatility is elevated at the 87^th percentile.

In recent trading at the January 19 monthly expiration, only two days away, calls have been active at the 160 and 165 strike prices, while puts have been active at the 155 and 160 strikes. On the call side, open interest is spread out over a number of strikes ranging from 150 to 175, whereas it’s a little more concentrated on the put side.

Looking at the February 16 monthly expiration, trading has been heavier on the call side, with the most activity at the 160 call. Yesterday, there was a sizable trade of 1,000 160-strike February 16 calls at a price of $6.50.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

Next week on the earnings front, another tech giant, Intel Corporation INTC, reports after the closing bell on Thursday, Jan. 25. It’s also a busy week for some of the other Dow components: Johnson & Johnson JNJ, Procter & Gamble Co PG and Verizon Communications Inc. VZ report before the open on Tuesday, Jan. 23, General Electric Company GE reports before the open on Wednesday, Jan. 24, and Caterpillar Inc. CAT reports before market open on Thursday, Jan. 25. And if you have time, make sure to check out today’s market update to see what else is going on.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.