IBM Earnings Preview: Optimism Abounds

IBM [[IBM]] is scheduled to report their fourth quarter 2009 results after the market closes on Tuesday, January 19, 2010. Based on our analysis, we at are expecting IBM to report better than expected quarterly results that will exceed Wall Street’s consensus expectations.


Analyst Expectations

We are forecasting revenues of $27.02 billion and EPS of $3.52. This would represent essentially flat revenues from last year’s $27.01 billion in the same period. The current analyst consensus estimates calls for revenues of $26.96 billion and EPS of $3.47. On October 15, the company increased their full year 2009 EPS guidance to “at least” $9.85 from “at least” $9.70. This implies fourth quarter EPS of “at least” $3.43.


Earnings Analysis

While it’s clear that enterprise IT spending is still in the early stages of recovery, IBM has been one of the star performers of the Dow of late. In 2009, IBM stock posted gains in 11 out of 12 months. IBM’s strong stock performance has been driven by eight consecutive quarters of delivering quarterly results that have exceeded Wall Street’s expectations. Investors should be encouraged that IBM’s management team is openly optimistic that these strong earnings performances will continue this quarter and into 2010.


IBM was the third-best performing stock in the Dow Jones Industrial average in 2009 and we expect them to be one of the top performers again in 2010. Wall Street is only expecting a very marginal 3% increase in revenues next year. However, we believe the rebound in corporate tech spending in 2010 could be much stronger than is currently anticipated. We would not be surprised to see IBM increase their 2010 earnings guidance following strong fourth quarter results.


Stock Performance

In 2009, IBM’s shares soared over 55% and easily outperformed the 19% gain in the Dow Jones industrial average.  



IBM stock is now trading at 12x consensus 2010 EPS estimates. This is a discount to the relative valuations of their peer group. While IBM is currently trading near their 52-week high, we believe the stock still has significant potential to trade higher.


Recommendation: Buy with a $140 price target


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