International Business Machines (IBM) is slated to step into the earnings limelight this coming Monday, and Wall Street isn’t expecting much from the blue-computing giant. Checking in on the numbers, the consensus is expecting a profit of $3.78 per share from IBM, down from $4.43 in the same quarter last year. Revenue is seen falling 14.1% to $20.92 billion.
While the headline figures will be important, continued growth in cloud, analytics, security, mobile and social revenue streams should be the most scrutinized, as these are areas that IBM has said in the past that it must expand upon to remain competitive. In the first quarter, analytics revenue grew by 20%, social by more than 40%, cloud by 75% and mobile by a whopping 400% — likely due to IBM’s partnership with Apple Inc. (AAPL).
Historically, IBM has performed above board when it comes to earnings. During the past four quarters, the company has topped expectations three times and missed once. As a result, EarningsWhisper.com reports a second-quarter whipser number of $3.82 for IBM. Should IBM top this figure, and reach the ballpark of its first quarter growth in key areas, IBM stock could be in for a bullish move.
Why bullish? Because expectations are low across the board for IBM at the moment.
For instance, Thomson/First Call reports that only three of the 23 analysts following IBM stock rate it a “buy,” compared to 16 “holds” and four outright “sell” ratings. Furthermore, the 12-month consensus price-target of $160 represents a 6% discount to IBM’s Thursday close. A positive report could elicit upgrades or price-target increases from this dour bunch.
In the options pits, speculators have snapped up puts at a rapid pace ahead of IBM’s quarterly report. Currently, IBM’s July/August put/call open interest ratio arrives at a relatively bearish reading of 0.98 — with puts in near parity with calls. What’s more, this ratio rises to 0.99 when looking at just the weekly July 24 options series.
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Overall, weekly July 24 series implieds are pricing in a potential post-earnings move of about 3.7%. This places the upper bound near $174, while the lower bound lies at $162.
Technically, IBM has had its issues in 2015, but the stock’s strength over the past couple of months pulled its 50- and 200-day moving averages into bullish cross in early June. Broader market headwinds (think Greece) have prevented IBM from fully taking advantage of this technical strength, and next week’s quarterly report could be the catalyst that allows IBM stock to finally breakout.
2 Trades for IBM Stock
Call Spread: With a strengthening technical backdrop, and a wealth of potential sideline money tied up in a heavily bearish sentiment backdrop, IBM has the makings of a solid contrarian pre-earnings play. Traders looking to bet bullish on IBM might want to consider an August $170/$175 bull call spread.
At last check, this spread was offered at $1.71, or $171 per pair of contracts. Breakeven lies at $171.71, while a maximum profit of $3.29, or $329 per pair of contracts, is possible if IBM stock closes at or above $175 when August options expire.
Put Sell: So, market headwinds and currency translation are a considerable risk when dealing with giant international blue-chip stocks like IBM. As such, post-earnings gains could be limited, or the stock could stall all-together. If you are concerned about such developments, then a weekly July 24 series $162.50 put sell might be more your speed.
At the close of trading on Wednesday, this July $162.50 put was bid at 55 cents, or $55 per contract. As long as IBM trades above $162.50 through July option expiration next Friday, traders who open this position will keep the initial premium received. However, if IBM trades below $162.50 before next Friday’s close, you may be assigned 100 shares of IBM stock for each contract sold at a cost of $162.50 each.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
