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Factors Expected to Influence IBM This Earnings Season (Revised)

Zacks Equity Research

International Business Machines IBM is set to report first-quarter 2019 results on Apr 16. The company surpassed the Zacks Consensus Estimate in the trailing four quarters with an average beat of 1.39%.

In the last reported quarter, the company delivered non-GAAP earnings of $4.87 per share, beating the Zacks Consensus Estimate of $4.81. However, earnings per share (EPS) decreased 5.9% from the year-ago quarter due to a higher tax rate.

Revenues of $21.76 billion managed to surpass the Zacks Consensus Estimate of $21.74 billion. However, the figure declined 3.5% on a year-over-year basis. At constant currency (cc), revenues dipped 1%. The year-over-year decline can primarily be attributed to currency fluctuation and headwinds from the IBM Z product cycle.

The Zacks Consensus Estimate for first-quarter earnings is pegged at $2.22, unchanged for the last 30 days. This reflects a decline of about 9.4% from year-ago earnings. For quarterly sales, the consensus mark stands at $18.65 billion, suggesting a 2.2% decline year over year.

IBM expects non-GAAP EPS of $13.90 for 2019. The Zacks Consensus Estimate is pegged at earnings of $13.91 per share, up 0.7% from the prior-year figure.

Let’s see how things are shaping up prior to this announcement.

International Business Machines Corporation Price and EPS Surprise

International Business Machines Corporation Price and EPS Surprise | International Business Machines Corporation Quote

Factors at Play

IBM’s significant investments in Strategic Imperatives — cloud computing, mobile, security, analytics, cognitive technologies and AI are acting as tailwinds. The company’s advanced hybrid cloud platform, AI and IoT capabilities should aid Vodafone Business, following a deal with Vodafone Group, with digital transformation initiatives in the quarter to be reported.

IBM's strength in automation, cognitive and optimization capabilities enable enterprises to run business processes efficiently in a cloud infrastructure.

Deal wins strengthen the company’s prospects in the digital transformation space. IBM’s advanced AI, IoT, blockchain, cloud and machine learning capabilities, among others, position its offerings for widespread adoption. We believe IBM’s portfolio strength will help in expanding customer base and boost top-line growth in the first quarter.

Product Rollouts Aid Growth

IBM recently completed the launch of its next-generation POWER9 processors for mid-range and high-end systems. These are designed for handling advanced analytics, cloud environments and data-intensive workloads in AI, HANA and UNIX markets.

The company also introduced new offerings optimizing both hardware and software for AI. Management believes that products like PowerAI Vision and PowerAI Enterprise will push new customer adoption.

IBM is also benefiting from notable customer wins, especially in the sports domain of late. The company is introducing several initiatives to bolster experience of the entities involved in sports leagues, from players, coaches to fans and management.

The company’s bid to integrate AI into sports systems is in sync with its strategy to go beyond fan engagement to influence players with robust strategies. These innovative solutions aided by IBM’s Watson positions the company well in gaining momentum.

While these developments are expected to positively influence results, IBM’s continued investments and pricing pressure related to its legacy hardware business, and ballooning debt levels remain headwinds.

What the Zacks Model Unveils

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

IBMhas a Zacks Rank #4 (Sell) and an Earnings ESP of +0.19%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks With Favorable Combination

Here are a few stocks that are worth considering as our model shows that these have the right combination of elements to deliver an earnings beat in their upcoming releases.

Cadence Design Systems, Inc. CDNS has an Earnings ESP of +0.50% and a Zacks Rank #1.You can see the complete list of today’s Zacks #1 Rank stocks here.

The Progressive Corporation PGR has an Earnings ESP of +2.26% and a Zacks Rank #2.

Netflix, Inc. NFLX has an Earnings ESP of +0.44% and a Zacks Rank #3.

(We are reissuing this article to correct a mistake. The earlier articles on this topic, issued on April 12, 2019, should no longer be relied upon.)

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