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IBM to Beat On Q2 Earnings: ETFs to Watch

Sweta Killa
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International Business Machines IBM is scheduled to report second-quarter 2018 results on Jul 18 after market close. Being the world’s largest computer-services provider, it is worth taking a look at its fundamentals ahead of the results.

IBM has been on a downtrend over the past three months, losing 9.4% compared with the industry’s decline of 9.6%. The negative trend might reverse as IBM is likely to beat earnings estimates and has attractive fundamentals.



Inside Our Methodology

IBM has a Zacks Rank #3 (Hold) and an Earnings ESP of +0.37%, indicating a reasonable chance of beating estimates this quarter. According to our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 stock when combined with a positive Earnings ESP may lead to an earnings beat. Zacks Rank #4 or 5 (Sell rated) stocks are best avoided going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though the stock has witnessed negative earnings estimate revision of a penny for the second quarter over the past 30 days, the Zacks Consensus Estimate reflects modest earnings growth of 2.02% from the year-ago quarter. IBM also projects year-over-year revenue growth of 1.90%. The earnings track is respectable, with an average earnings surprise of 2.92% for the last four quarters. Further, the stock boasts a top Value and Momentum Score of A each and belongs to a top-ranked Zacks industry (top 44%) (read: 5 Excellent ETF Plays as Q2 Earnings Cycle Begins).

According to the analysts compiled by Zacks, IBM has an average target price of $173.92 with 40% of the analysts having a Strong Buy or a Buy rating and 60% having a Hold rating ahead of earnings. This represents more than 19% upside form the current price.

Price, Consensus and EPS Surprise

Price, Consensus and EPS Surprise | Quote

What to Watch?

Strategic areas like cloud computing, security software, data analytics and artificial intelligence as well as the new wave of blockchain technology are acting as significant tailwinds to the company’s top line. In particular, market participants are anticipating security business to reveal faster growth given the heightened security climate (read: Want to Tap China's Blockchain Usage Spree? Play BCNA).

ETFs in Focus

Given this, ETFs having the highest allocation to this this tech giant will be in focus going into its earnings announcement. These funds could be potential movers if IBM surprises the market:

First Trust NASDAQ Technology Dividend Index Fund TDIV

This fund provides exposure to dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index. The product has amassed about $888.5 million in its asset base while trading in volume of around 85,000 shares per day. It charges 50 bps in annual fees and holds about 94 securities in its basket. Of these firms, IBM takes the second spot, making up roughly 8.1% of the assets. In terms of industrial exposure, the fund allocates about 25.7% of the portfolio in semiconductor and semiconductor equipment, followed by technology hardware, storage & peripherals (15.6%), software (15.1%), and diversified telecom services (12.4%) (read: Let Your Portfolio Mirror Buffett's With These ETF Strategies).

Invesco Dow Jones Industrial Average Dividend ETF DJD

This ETF offers exposure to high-yielding companies included in the Dow Jones Industrial Average by their 12-month dividend yield over the prior 12 months. It holds 29 stocks in it basket, with IBM occupying the seventh position with 4.9% allocation. Information technology, healthcare, consumer staples and energy are the top four sectors. DJD has been able to manage assets worth $13.7 million while trading in a volume of 7,000 shares a day on average. It charges 30 bps in annual fees and has a Zacks ETF Rank #3 (Hold).

Innovation Shares NextGen Protocol ETF KOIN

This product follows the Innovation Labs Blockchain Innovators Index, which measures the performance of a diversified group of publicly-listed companies that use, or are involved in, blockchain. Holding 45 stocks in its portfolio, IBM is the tenth firm with 4.5% share. The ETF has the largest allocation to information technology sector at 67% while financials, consumer discretionary and energy round off the next three spots. It has accumulated $7.6 million in its asset base since its debut in late January and trades in average daily volume of 11,000 shares. Expense ratio comes in at 0.65%.

Schwab U.S. Dividend Equity ETF SCHD

With AUM of $7.6 billion, this product offers exposure to the 109 high dividend yielding U.S. companies that have a record of consistent dividend payments supported by fundamental strength based on financial ratios and ample liquidity. This can be easily done by tracking the Dow Jones U.S. Dividend 100 Index. IBM occupies the eighth position in the basket with 4.2% of the portfolio. Consumer staples and information technology are the top two sectors with over 20% share each. The fund trades in solid volume of more than 1 million shares a day and is one of the low cost choices in the dividend space, charging 7 bps in fees per year. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: S&P 500 Offers Record Dividends in Q2: How to Tap With ETFs?).

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