IBM Stock Still Has Hope Despite Disappointing Q3 Result

Big Blue’s share price crumbled after the latest IBM earnings report, but hidden positives offer some rationale for a contrarian investment.

By Josh Enomoto, InvestorPlace Contributor

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IBM Stock Investors Don't Yet Get It: Red Hat Deal is Real Game-Changer

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A seemingly perennial Dow Jones laggard, International Business Machines (NYSE:IBM) had just started to gain its mojo in the second half of this year. Many investors were willing to give IBM stock another look as evidence indicated momentum towards relevant, lucrative businesses.

Unfortunately, last week’s market crash took the wind out of the company’s sails. While the benchmark indices enjoyed a nice comeback recently, we’re still significantly below October’s opening volley. Unless Wall Street quickly repositions itself, we may still see continued volatility. If so, that doesn’t do any favors for the IBM stock price.

Prior to the company’s third-quarter earnings report, management was already under significant pressure. Since 2011 when “Big Blue” rang up nearly $107 billion in annual revenue, that metric eroded steadily and consecutively. This year, IBM is on pace to reverse this dubious trend, albeit slightly.

Therefore, it was critical for the lumbering tech giant to produce standout results for the latest IBM earnings report. An overall bearish outlook doesn’t end on slightly good news. That concept can be exponentially multiplied in this present market environment. With sector stalwarts like Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) suffering a poor October, IBM stock needed something special.

The Street clearly expressed optimism ahead of IBM earnings. Just prior to the financial disclosure, the IBM stock price gained nearly 3% on Tuesday. That performance was roughly in line with its rivals.

Unfortunately, it all fell apart once the print came in.

IBM Stock Trips Badly on Mixed Q3 Results

You typically can have confidence in the consensus opinion. However, with the IBM earnings report, the consensus was wrong: Big Blue just didn’t come through. That said, I’d caution the bears from over-celebrating their victory.

The most-discussed metric was a clean win for speculators. Wall Street anticipated earnings per share of $3.40. Individual estimates ranged from $3.26 to $3.51. The actual EPS came in at $3.42, or a 0.6% positive surprise.

While the margin of the beat was tiny, in the year-ago IBM earnings report, the company missed EPS expectations. Against a consensus target of $3.28, the actual figure delivered was $3.26.

Moreover, so far in in 2018, Big Blue has exceeded EPS targets three times out of three. That’s a marked improvement over last year, when management only produced one win, in Q2.

Unfortunately, sentiment soared on IBM stock when analysts looked at the revenue front. The consensus called for $19.1 billion. Individual forecasts varied relatively widely, ranging from $18.8 billion to $19.3 billion. Surprisingly — and not in a good way — IBM offered a meek $18.76 billion.

Two points immediately stand out. First, the sales haul dipped below the most bearish analyst’s estimate. Second, even if IBM hit the consensus number, it would have fallen slightly below the year-ago IBM earnings report’s revenue of $19.15 billion.

But the more critical factor is that the bull case for IBM stock absorbed a substantial blow. The company’s biggest money-maker, Technology Services and Cloud Platforms, rang up $8.3 billion in sales, down 2% from Q3 2017. The Cognitive Solutions segment registered $4.1 billion, down 6% year-over-year. Both divisions missed analyst expectations.

As our own James Brumley warned, generating growth in fresh businesses is easy. Keeping the momentum going is the tough part, which the Q3 IBM earnings report failed to do.

Big Blue Is Still an Interesting Longer-Term Investment

During the afterhours session, traders did a number on the IBM stock price. Shares were incredibly volatile before eventually opening at a 7.5% loss. So does that mean all hope is lost?

I admit that this IBM earnings performance was not what I hoped for. This was an opportunity for management to reassert control, and they came up short. Plus, it pushes shareholders’ patience to the brink.

However, we shouldn’t ignore some underappreciated positives. For one thing, the market volatility is a blessing in disguise. The current focus is on stability, and while tech names don’t typically fit that narrative, IBM pays a generous dividend. Usually, dividend-paying companies perform better in bearish market cycles.

Another point to consider is international growth. The aging tech firm has inked several lucrative cloud-solutions contracts with foreign governments and institutions. Bear in mind that in this recent IBM earnings report, Global Business Services generated $4.1 billion in sales, up 1% YOY and above consensus estimates.

Certainly, IBM stock isn’t the perfect opportunity. But thanks to an environment that favors dividend stocks and noticeable traction in international businesses, I’d give it a chance.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/10/ibm-stock-still-has-hope-despite-disappointing-q3-result/.

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