IBM Earnings Preview: Q408

IBM [[IBM]] is scheduled to report fourth quarter 2008 results after the market closes on Tuesday, January 20. Based on our analysis, we at are expecting IBM to report disappointing results that fail to meet Wall Street’s expectations.


Analyst Expectations

We are forecasting revenues of $27.55 billion and EPS of $2.90. This would represent a 5% decline in revenues from last year’s $28.87 billion in the same period. The current analyst consensus calls for revenues of $28.28 billion and $3.03 EPS.


IBM, like many of the other global companies, will certainly be feeling the negative impact of the rising U.S. dollar during the fourth quarter. While this negatively impacts top-line revenues, it is offset by the positive impact to operating expenses. However, overall we still be believe this could be a major contributor to a poor quarterly performance.


2009 could be a tough year for the tech sector, as companies look to cut their cap ex budgets in an effort ride out the economic storm. Forrester Research is predicting global purchases of IT goods and services to fall by 3% in 2009 after gaining 8% in 2008. Despite their incredible business model with large recurring revenue streams, if customers begin delaying tech spending en mass, then IBM’s 2009 sales growth will be sluggish at best. The good news is that tech spending is expected to rebound in 2010 with strong 9% growth.


Share Performance

IBM’s shares are down 36% from their 52-week of $130.93 set in July 2008. In 2008, their shares dropped 23% while outperforming the 34% drop in the Dow Jones index.



Shares are now trading at 9.4x consensus 2009 EPS estimates. While this represents a reasonable valuation, we would not be surprised to see analysts revise their 2009 EPS estimates further downward. At best, we see few catalysts to lift this stock until at least the second half of the year.


Recommendation: Hold with a $100 price target.


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