(IBM) International Business Machines Earnings Estimates Rising

February 4th, 2010

The earnings performance for International Business Machine Corp. (IBM) has been quite stellar in recent quarters and has consistently surpassed the Zacks Consensus Estimate. IBM posted impressive numbers last quarter with better-than-expected revenue, margins and profitability.

IBM also reported higher Services and software revenue last quarter, while hardware fell, though not as much as in the previous quarters. The company’s cost-cutting initiatives and growing focus on high margin business, such as services and software, have improved margin in all of its segments, particularly the Services, Financing, and Systems and Technology segments. This has enabled IBM to generate the fourth-quarter earnings surprise.

Moreover, IBM’s full-year 2009 earnings of $10.01 per share were up 13% year over year, and net income of $13.4 billion rose 9% from fiscal year 2008. Earnings for the year were a record, despite the worldwide recession. Full-year earnings surpassed the Zacks Consensus Estimate of $9.88 per share, as well as the company’s own guidance of $9.85 per share.

The company’s spectacular amount of new services contract signings and a pick up in corporate IT spending figured into the improved guidance for fiscal 2010. Historically, IBM has raised its guidance for almost every quarter in the last two years. For fiscal year 2010, the company again raised its EPS guidance to $11 per share, up from a previously expected $10-$11 per share range last month.

This prompted 15 of the 22 analysts covering the stock to raise their full-year 2010 EPS estimates in the last 30 days, with just one analyst making a downward revision. Revisions to the full-year numbers have shown a very significant upward (positive) bias, indicating positive sentiment on IBM’s performance.

We should, however, keep in mind that the company has historically provided conservative guidance, which is reflected in the number of positive revisions, as well as the earnings surprises. The current Zacks Consensus Estimate calls for $11.12 per share in 2010 earnings, above the company’s revised guidance. The estimate is up by 11% from 2009.

In terms of earnings surprises, earnings exceeded in each of the last four quarters, with a four-quarter average of 5%. This means that on an average, earnings beat the Zacks Consensus Estimate by 5%, which is also positive. However, there is no upside potential to the upcoming quarter, and earnings are expected to be inline with the Zacks Consensus Estimate. Hence we do not expect significant price movement in the stock in the near-term. The current Zacks Consensus Estimate for the first quarter of 2010 is $1.95, up 14.7% from the year-ago period.

We expect IBM to post stronger results in the back half of 2010. IBM is well positioned to benefit from the growing software and services market and take advantage of new initiatives such as Smarter Planet, Business Analytics and Optimization and Cloud Computing. IBM spent almost $6 billion in R&D in 2009.

However, revenue has been taking a hit on currency fluctuation and fell 8% year over year in 2009. To maintain profits, the company has been working on lowering costs. Thus, in 2009, IBM had generated higher profit on lower revenue, driven by cost cutting. We would ask investors to remain on the sidelines until the stock delivers improved sales traction.

We are optimistic about IBM’s long-term performance and believe there is significant upside potential, although the lack of estimate revisions for the upcoming quarter and slow revenue growth is reflected in our Zacks #3 Rank (‘hold’).

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(IBM) International Business Machines Earnings Estimates Rising

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