Can Big Blue Deliver?
With Intel in the books, and all indications of a tech recovery afoot, IBM's report after the bell tonight should go a long way toward keeping the tech rally alive. As long as expectations aren't exceeding reality when it comes to the company's growth and outlook.
And in the current, delicate climate for investors, that's an "if" worth considering. That's just a necessary caveat, but there's little chance this company won't beat expectations tonight. Consider that IBM has beaten for the past two years straight, in far more difficult environments than this one. With momentum and trends on its side, tonight should be eye-opening, along the lines of Intel's report last week.
There's little question that IBM will beat the Street tonight. Analysts are anticipating about $3.47 a share on $27 billion in revenue. But tonight's report only tells part of the story. IBM's outlook will be key, whether it raises full-year EPS estimates, and where the global strength might be coming from. Pay attention to Asia, particularly China here.
The company's earnings growth is impressive, and so is sentiment, and despite a nice run since those March lows of last year, the company is still only trading at 12 times next year's earnings. Cheap, cheap, cheap. We focus a lot of our attention on the likes of Cisco Systems, Hewlett-Packard, even Intel and Microsoft when it comes to big cap tech, and while I have written and reported extensively on how compelling the Cisco Systems business model might be, that doesn't mean that IBM should be ignored, especially in the short term. (Cisco, by the way, is a little more expensive at 15 times next year's earnings.)
IBM sits in a great position to take advantage of the corporate IT spending upgrade cycle, and yet its stock has not performed nearly as well as its contemporaries in the market place. Yes, shares are rallying, but the indications are that despite that growth, there might be plenty of room left to room. Last year, IBM jumped more than 50 percent, compared to the 20 percent gain on the Dow. But even there the company sits at a discount to other big names in tech. That's why guidance is so important tonight. Execs have already sung an optimistic tune for 2010, so at the very least, that tone will need to continue tonight, if not improve even more. I certainly expect the latter.
Along those lines, look for the company to guide first quarter revenue to around $22.3 billion, EPS in the $1.91 range.
Beyond the immediate impact of the numbers, other key areas to focus on: Did quarterly revenue expand year over year? Indications are that it should, and strongly. IBM has posted five straight years of gross margin improvement, and that should continue tonight with the Street looking for improvement from 43.3 percent a year ago to 45.1 percent tonight. Back in 2006, the company took the unprecedented step of offering an EPS-growth roadmap, anticipating $10 or $11 for 2010. Does the company raise its full-year EPS expectations again tonight; if so, the stock could pop. Keep a close eye on the company's "services" revenue, and its signings, which almost hit $12 billion last quarter.
But IBM is also at risk of facing what Intel did after its stellar earnings last week: The company blew past earnings expectations, offered a great outlook, the stock blossomed on the headlines, and then wilted overnight as traders supplanted investors and Intel retreated. There's a good chance that could happen to IBM tonight, but over the coming weeks, after investors get a chance to digest the outlook — assuming it's good — that these shares might rally anew.
Investors longer term also have to look at the strategies this company is employing to sit as pretty as it can as it faces stiffer competition from the likes of Cisco and HP. IBM insiders tell me they continue to steal business from Sun Microsystems with so much unease still swirling around that company's acquisition by Oracle, which could get the official go-ahead this week. And while IBM might face a threat in its healthcare business from Dell and its acquisition last year of Perot Systems, Dell still needs to integrate that deal and the company's execution track record still leaves a lot to be desired.
IBM is sitting pretty; and later tonight it seems the company will be ready to stand and deliver.