Dow Jones Industrial Average constituent and tech giant International Business Machines Corp. (NYSE:IBM) reports earnings Tuesday night. Right now, I want to take you through a look at recent announcements, charts and what, if anything, the options market is suggesting will happen to IBM stock after its first-quarter report.
Analysts are forecasting earnings of $2.35 per share for IBM’s first quarter, implying no movement year-over-year after trending higher sequentially over the last three quarters. That also would be a significant 53% drop from Q4 earnings of $5.01 per share.
Similarly, IBM’s revenues are expected to dip from last quarter’s sales take of $21.8 billion to $18.4 billion. The year-over-year sales decline is less severe, just narrowly under Q1 2016’s result of $18.7 billion. Still, that would be the 20th consecutive annual decline.
Erosion in its mature IT data and service provider businesses are countering growth within the company’s Strategic Imperatives (SI) unit and IBM’s Watson product.
Analysts and Trading Records
The Wall Street community is mixed to moderately bearish on IBM stock.
Among 27 polled analysts, two-thirds have hold recommendations compared to six buys and four sells. The median price target on IBM stock is $168, which is less than current prices right above $170. Having said that, if a bullish earnings surprise were to play out, there’s certainly room for upward and supportive revisions from analysts.
IBM has at least beat Street profit views in 10 of its past 12 quarters. However, investor reaction to quarterly results has proven awfully bearish in the aftermath. Working backwards, shares of IBM have moved 2.25%, -2.62%, -0.17%, -5.59%, -4.88% and -5.75% on a close-to-close basis.
The net reaction in IBM stock has produced an average loss of 2.79% with variability of 3.26% based on a one-standard-deviation reading. When you combine the two metrics, you see that IBM has favored the bears, with an estimated range of -6.05% to a modest gain of 0.47%.
IBM’s seven-day stock performance has been less volatile and a bit more mixed in yielding an average loss of 0.72% with variability of 4.38% and a tied-at-the-hip estimated range of -4.38% to 3.66%.
IBM Stock Daily Chart
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Thus far in 2017, IBM has continued with its bullish trend, albeit at a slightly more subdued pace of 3.6% year-to-date that’s mostly on par with the broader market’s performance. Currently and for the past couple months shares of IBM have pulled back into a constructive-looking pullback pattern.
My interpretation is with weekly stochastics oversold and IBM having tested the 38% retracement level from its October pivot low, there’s evidence a critical low within the uptrend is being formed.
Yet if shares do continue to decline, I’d estimate IBM stock could fall to the prior breakout area near $162 while still maintaining the integrity of the uptrend.
IBM Stock Options Pricing
Behind the scenes, implied and underlying volatility in IBM stock have seen a widening of their spread as premiums have firmed up while actual stock volatility has continued to press lower near 52-week lows. Given the upcoming earnings event, the disparity is hardly surprising and is prone to some type of convergence after the report.
With prices at $170.80, the at-the-money April $170 straddle market points to a 68% chance IBM will remain within an approximate price range of $164.40 to $177.20 into Friday’s expiration. The math behind this calculation is based on implied volatility of 36% with four trading sessions remaining.
Regarding the earnings move, the April contract is the purest play on IBM stock as there’s less opportunity for the reaction by traders to be impacted by broader market noise. In turn, for those positioning in these calls and puts and trying to leverage the earnings event to their advantage … well, if you live by the sword, you die by the sword.
The expected move up or down works out to wiggle room of about +/-3.8% in IBM by Friday’s close. Thus, it appears options traders are pricing in a normal (but slightly more volatile) earnings reaction in IBM stock.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
