(IBM) International Business Machines 2011 Fourth Quarter Earnings Preview

International Business Machines Corp. (IBM) is all set to report its fourth quarter and full year 2011 results on January 19, 2012, after the market closes. We expect IBM to report modest results due to sluggish IT spending partially offset by robust growth from its key growth initiatives.

We note that IBM has posted an average earnings surprise of 1.86% in the trailing four quarters, implying that it has outdone the Zacks Consensus Estimate by the same magnitude for the last four quarters. We do not expect any major changes in the earnings trend pattern for the current quarter.

Prior Quarter Recap

IBM reported mixed third quarter 2011 results with earnings per share (EPS) surpassing the Zacks Consensus Estimate by 6 cents (2.0%) but revenues falling shy of the estimate of $26.24 billion.

IBM posted non-GAAP EPS of $3.28 in the third quarter, up 15.1% on a year-over-year basis and representing double-digit growth in 17 of the last 19 quarters.  The significant upside was primarily driven by solid revenue growth (22 cents), margin growth (3 cents) and share repurchases (18 cents).

Total revenue increased 7.8% year over year (3.0% adjusted for currency) to $26.16 billion. The upside was driven by continued strength across growth markets, which was 23.0% of IBM’s total geographic revenue in the third quarter. Strong performance from the growth markets fully offset the sluggish performance in the major markets (up 5.0%, flat at constant currency) during the third quarter.

IBM raised its fiscal 2011 operating EPS estimate to at least $13.35 from its previous guidance of at least $13.25. GAAP EPS guidance was also raised to $12.95 from the earlier projection of at least $12.87.

Estimate Revision Trend

Currently, the Zacks Consensus Estimate for the fourth quarter is pegged at $4.62, up 10.5% from $4.18 reported in the year-ago quarter. This is based on an estimated revenue growth of 2.5% to $29.74 billion.

Analysts seem to be divided in their opinions for the current quarter. Of the 19 analysts covering IBM, two raised their estimates in the last 30 days, while two lowered their estimates during the same period. However, the Zacks Consensus estimate went down a penny over the last 30 days, implying a slightly negative bias.

Corrections were also seen in the fiscal 2011 estimates, with three analysts lowering their earnings forecast and only one analyst raising the estimate in the last 30 days. However, this did not bring about any significant change in the Zacks Consensus Estimate, which currently stands at $13.37, at least 2 cents above management’s non-GAAP guidance.


We believe that IBM remains well positioned for long-term growth based on its four key growth initiatives: smarter planet, growth markets, business analytics and cloud computing, which are expected to deliver at least $50 billion in revenues by fiscal 2015. We believe that IBM’s strong product pipeline, expansion into emerging markets and continuous acquisitions will help it to achieve this target going forward.

We also believe that a strong patent portfolio and accretive acquisitions will provide IBM a competitive edge over other prominent vendors, including Oracle Corp. (ORCL), Hewlett-Packard Co. (HPQ), Microsoft Corp (MSFT) and EMC Corp (EMC).

It is true that IBM has been one of the most consistent performers over the last one year, outperforming the S&P 500 by approximately 19.0%. However, modestly slower IT growth, primarily due to volatile macroeconomic conditions; a high level of unemployment; continuing European debt crisis and unfavorable foreign exchange fluctuations are expected to negatively impact the forthcoming quarters. Valuation also looks rich, in our view.

We have a long-term Neutral recommendation on IBM and are optimistic about its strong fundamentals and robust growth prospects going forward. Currently, IBM has a Zacks #4 Rank, which translates into a short-term Sell rating.

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