Don’t Expect an Earnings Surprise From IBM

All eyes are on Lenovo Group and IBM (IBM) as the former finalizes its $2.1 billion acquisition of IBM’s low-end server business. With just days left until the deal closes — and just a few weeks until IBM’s next earnings report — is now the time to buy?

Company Profile

ibm stockIBM is a one-stop shop for about any technology solution that a business might need — from hardware, software, services and ongoing support. IBM spends a lot of money on research and development, has one of the most recognizable brands and is still the second largest company in the industry.

IBM has gone to great efforts to increase shareholder value, including an aggressive share buyback program and a two decade track record of annual dividend increases. At current prices, IBM pays a 2.3% dividend.

Earnings Buzz

However, given the the latest analyst estimates for IBM’s sales and earnings going forward, the dividend isn’t enough to justify buying IBM shares.

For this upcoming quarter, analysts expect IBM to earn $4.32 per share on $23.43 billion in revenue, which works out to a 1.2% year-on-year drop in sales and 8.3% earnings growth. The drop under-performs the industry average of 67.7% forecasted earnings growth.

To add insult to injury, the consensus earnings-per-share estimate for IBM has fallen in recent weeks, indicating that analysts are uncertain of whether IBM can meet even these meager projections. IBM is slated to report fiscal third-quarter results after the closing bell on October 16, but I don’t expect this announcement to turn any heads.

Current Ratings

After spending over a year in “sell” territory, IBM has finally progressed to a “C.”

However, there’s plenty of work left to be done before I recommend IBM stock for new money. Right now, IBM earns a “C” for its Quantitative Grade, indicating mediocre institutional buying pressure — this is a measure of the stock’s risk-to-return ratio. On the fundamentals side, IBM averages a “B.” We need to see some improvement from its sales (D) and its track record of earnings surprises (D), as well as analyst earnings revisions (C).

However, the company does score well on cash flow (A), return on equity (A), operating margin growth (B), earnings growth (B) and earnings momentum (B). IBM is still a ways away from graduating to a “buy.” As of this posting, September 29, I consider IBM a “C-rated hold.”

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Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip GrowthEmerging GrowthUltimate GrowthFamily Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.


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