IBM Earnings Preview: Second Quarter 2009

IBM [[IBM]] is scheduled to report their second quarter 2009 results after the market closes on Thursday, July 16. Based on our analysis, we at are expecting IBM to report better than expected results that exceed Wall Street’s consensus expectations.


Analyst Expectations

We are forecasting revenues of $24.08 billion and EPS of $2.10. This would represent a 10% decline in revenues from last year’s $26.82 billion in the same period. The current analyst consensus estimates calls for revenues of $23.58 billion and EPS of $2.02. On April 20, the company provided full year 2009 EPS guidance of “at least $9.20 per share.”


Our conviction remains that revenue declines bottomed in the first quarter of this year and we expect to see improvements beginning with IBM’s second quarter results. Forrester Research is now expecting the US IT market to shrink by 5% in 2009 and the global IT market to drop by 11% in US dollars. However, we believe that most of the impact of declining IT budgets has already been felt in the first half of the year and would expect a modest rebound in spending in the second half of 2009 and into 2010.


Despite better than expected first quarter results, Wall Street is still discounting the company’s 2009 EPS guidance of at least $9.20. The current consensus expectation now stands at $9.13 and management continues to stand by that forecast. Although the economic environment will likely remain challenging for the remainder of the year, IBM’s strong business model and cost cutting measures should allow it meet their full year EPS guidance.


Share Performance

Since the beginning of the year, IBM’s shares are up over 20%. In 2008, IBM’s shares fell 22% but were able to outperform the 34% decline in the Dow Jones industrial average.



Shares are now trading at 10x consensus 2010 EPS estimates. This is below the relative valuations of their peer group. Despite the 20% increase in their stock price since the start of the year, Wall Street still is convinced that IBM can achieve their earnings guidance for the year. This presents an upside opportunity for investors as we expect IBM to hit their guidance numbers and exceed Wall Street’s consensus expectations.


Recommendation: Buy with a $120 price target.


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