IBM (IBM) is scheduled to release its third-quarter earnings report after the close tonight, and Wall Street is looking for a reversal of last quarter’s 8% year-over-year decline. Going by the numbers, analysts are projecting IBM earnings of $3.96 per share for IBM — up 9.5% from the same quarter last year. Revenue, meanwhile, is seen flat at $24.7 billion.
Investors will certainly be scrutinizing IBM’s operating margins and cash flow for signs as to whether or not IBM earnings will hit the company’s state goal of $20 per share by fiscal 2015. Overall, IBM has focused heavily on its bread-and-butter fields of Big Data and analytics, while expanding its presence in the rapidly growing field of cloud computing.
Despite the tough global computing and business services market, IBM stock remains a favorite within brokerage community. For instance, EarningsWhisper.com reports that IBM’s third-quarter whisper number arrives at $4.03 per share, 7 cents better than the consensus.
That said, data from Thomson/First Call reveals that analysts have doled out 10 “buy” ratings, 13 “holds,” and just 2 “sells.” What’s more, IBM’s 12-month consensus price target rests at $215.90 — a premium of about 17% to yesterday’s close at $184.66. As you can see, despite the overall positive outlook from the brokerage community, there still is plenty of room left on the bullish bandwagon heading into the IBM earnings report.
Turning to the options pits, we find a hefty degree of uncertainty present in IBM’s short-term options configuration. Specifically, the stock has attracted 85,630 puts in the October/November series of options, compared to 86,542 calls. The result is a put/call ratio of 1.01 for IBM’s front two months of options. Since options traders typically have a bullish overall bias, especially ahead of earnings events, I’m inclined to view this noncommittal options activity prior to IBM earnings in a bearish light.
Click to Enlarge From a technical perspective, it’s easy to see why options traders are starting to side with the bears. Since peaking near $211 in June, IBM stock has shed nearly 12%, breaching support at the psychologically important $200 level, and pulling its 50- and 200-day moving averages into a bearish cross in the process.
Despite this black mark on IBM’s technicals, IBM stock appears to have formed a double bottom near $180. Currently, the stock is looking to reclaim its 50-day moving average, which should open up a bit of breathing room before the stock has to deal with its 200-day trendline and the $200 level.
Traders looking to position themselves ahead of IBM earnings should know that October implieds are pricing in a potential post-earnings move of about 4%. This would place the upper bound near $192.30, while the lower bound resides at $177.70.
For those looking for IBM stock to bounce back from its current perch just above key technical support, a Nov 180/190 bull call spread might just be the answer. At the close of trading on Tuesday, this spread was offered at $5.32, or $532 per pair of contracts, placing breakeven at $185.32.
A maximum profit of $4.68, or $468 per pair of contracts, is possible if IBM closes at or above $190 when November options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.