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International Business Machines Corporation (IBM) Gets Investors’ Attention: Here’s What You Need to Know

IBM (IBM) is one of the most viewed stocks by visitors to Zacks.com lately. So it might be worth looking at some of the factors that could affect the stock’s short-term performance.

Over the past month, shares of this technology and consulting company have returned +8.8%, compared to the +2.9% change in the Zacks S&P 500 composite. During this period, the industry Zacks Computer – Integrated Systems, of which IBM is a part, gained 8.5%. The key question now is: what could be the future direction of the title?

Although media reports or rumors of a material change in a company’s business outlook usually cause its stock to trend and result in an immediate price change, there are always certain fundamental factors that ultimately determine the buy and hold decision.

Revisions to earnings estimates

Rather than focusing on anything else, at Zacks we prioritize assessing change in a company’s earnings projection. Indeed, we believe that the fair value of its shares is determined by the present value of its future earnings streams.

Our analysis is primarily based on how sell-side analysts covering the stock revise their earnings estimates to reflect the latest trading trends. When a company’s earnings estimates increase, the fair value of its stock also increases. And when the fair value of a stock is higher than its current market price, investors tend to buy the stock, causing its price to rise. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term movements in stock prices.

IBM is expected to post earnings of $3.62 per share for the current quarter, representing a year-over-year change of +8.1%. Over the past 30 days, the Zacks consensus estimate has changed by -4.7%.

The current year earnings consensus estimate of $9.19 indicates a year-over-year change of +15.9%. This estimate has changed by -1.5% over the last 30 days.

For the next fiscal year, the consensus earnings estimate of $9.78 indicates a change of +6.3% from what IBM is expected to report a year ago. Over the past month, the estimate has changed by -3.1%.

With an impressive externally audited balance sheet, our proprietary stock rating tool – the Zacks Ranking – is a more conclusive indicator of a stock’s short-term price performance because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent change in the consensus estimate, plus three more factors related to earnings estimatesresulted in a Zacks Rank #3 (Hold) for IBM.

The chart below shows the evolution of the company’s consensus 12-month EPS estimate:

12 month EPS

Expected revenue growth

While a company’s earnings growth is arguably the best indicator of its financial health, nothing happens if it can’t grow its revenue. It is almost impossible for a company to increase its profits without increasing its revenue for long periods of time. Therefore, knowing the potential revenue growth of a business is crucial.

For IBM, the consensus sales estimate for the current quarter of $15.85 billion indicates a year-over-year change of -5.1%. For the current and future fiscal years, the estimates of $59.69 billion and $60.19 billion indicate variations of -15.7% and +0.8%, respectively.

Latest reported results and history of surprises

IBM reported revenue of $14.11 billion last quarter, representing a -19.9% ​​year-over-year change. EPS of $1.81 for the same period versus $2.52 a year ago.

Compared to the Zacks consensus estimate of $13.73 billion, reported revenue is a surprise +2.72%. Surprise EPS was +1.69%.

In the past four quarters, IBM has exceeded consensus EPS estimates three times. The company has exceeded consensus revenue estimates three times during this period.

Evaluation

No investment decision can be effective without considering the valuation of a stock. Whether a stock’s current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects is a key determinant of its future price performance.

While comparing the current values ​​of a company’s valuation multiples, such as the price-to-earnings (P/E) ratio, the price-to-sales (P/S) ratio, and the price-to-cash flow (P/CF) ratio , with its own historical values ​​help determine whether its stock is fairly valued, overvalued or undervalued, comparing the company against its peers on these metrics gives a good idea of ​​the reasonableness of the stock price .

The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to traditional and unconventional valuation metrics to rank stocks from A to F (an A is better than a B; a B is better than a C; and so on), is quite useful in determining whether a stock is overvalued, correctly priced, or temporarily undervalued.

IBM is rated B on this front, indicating that it is trading at a discount to its peers. Click here to see the values ​​of some of the rating metrics that led to this rating.

Conclusion

The facts discussed here and plenty of other information about Zacks.com might help determine whether or not it’s worth paying attention to the market buzz about IBM. However, its No. 3 Zacks ranking suggests it could perform in line with the broader market in the near term.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.