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What Should Investors Expect from IBM's Q2 Earnings After Red Hat Deal?

Benjamin Rains

Shares of IBM IBM have easily outpaced the market in 2019 and the firm officially announced the completion of its $34 billion deal to buy Red Hat last week. With this in mind, let’s see what investors should expect from the tech firm’s second-quarter 2019 financial results that are due out after the closing bell on Wednesday as Q2 earnings season heats up.

Quick Q2 Projections

The big banks help unofficially kick off earnings season Monday, with more to follow in what is the first truly busy week of earnings season. Overall, more than 140 companies are set to report their quarterly results this week. This list features nearly 60 S&P 500 members, which includes IBM’s cloud computing rival Microsoft MSFT, Netflix NFLX, and others.

Total Q2 2019 earnings for the S&P 500 index are expected to be down -3.4% from the year-ago period on +3.9% higher revenues. This would follow the -0.2% decline on +4.5% higher revenues in Q1 (also read: What to Expect from Bank Earnings?).




IBM Overview

The last five years have not been particularly kind to IBM as it has seemingly failed to impress investors with its ability to grow in a quickly-changing tech world. IBM stock is down 26% during the past five years, against its industry’s roughly 40% climb and the S&P 500’s 62% growth. IBM has, however, performed well so far this year, up 26%, compared to the S&P’s 19% gains.

Despite the recent positivity, IBM in April posted its third straight quarter of declining revenues. Like many tech firms, from MSFT to Google GOOGL, IBM has spent the last several years trying to expand its artificial intelligence and cloud computing units, as its equipment and services sales slow. Part of this effort now includes its newly-finalized real to buy open-source software firm Red Hat.

The purchase is projected to help IBM try to stand out in the hybrid cloud market, which is an increasingly important cloud segment. Firms around the world utilize the hybrid cloud to manage software and other systems along with various cloud offerings and their own data centers. “IBM is preserving Red Hat’s independence and neutrality and Red Hat will strengthen its existing partnerships to continue to give customers freedom, choice and flexibility,” IBM wrote in prepared remarks on July 9.

“Both companies have already built leading enterprise cloud businesses with consistent strong revenue growth, as they help customers transition their business models to the cloud.”

Outlook

Last quarter, IBM topped our earnings estimate even though its adjusted Q1 EPS figure slipped 8% from the year-ago period. Meanwhile, the company’s quarterly revenue dipped 4.7% and fell short of our estimate.

Looking ahead, the Zacks Consensus Estimate calls for IBM’s top-line to slip at a similar pace in Q1, down 4.5% against Q2 2018 to hit $19.11 billion. On top of that, the firm’s full-year fiscal 2019 revenue is projected to sink 3.5% to $76.82 billion.

At the bottom end of the income statement, IBM’s adjusted Q2 earnings are expected to fall from $3.08 per share in the prior-year quarter to $3.06 a share. Meanwhile, IBM’s full-year fiscal 2019 EPS figure is expected to pop 0.60%.

Investors should also note that IBM has seen no earnings estimate revision activity over the last 60 days. Yet, its Q2 estimate is down from its previous $3.16 a share projection before IBM posted its Q1 results. It is also worth noting that the company almost always beats earnings estimates, so it will likely have to do much more than that to impress investors.

Bottom Line

IBM is scheduled to report its quarterly results after the market closes on Wednesday, July 17. But Wall Street might be more eager to hear what the firm has to say at its annual investor briefing on August 2, since that is when it will dive into its 2019 and medium-term projections that reflect its Red Hat addition.

IBM is currently a Zacks Rank #3 (Hold) that boasts an “A” grade for Value and a “B” for Momentum in our Style Scores system. IBM is also a dividend payer that currently pays an annualized dividend of $6.48 a share, with a yield of 4.54% at the moment. The firm, which has consistently raised its quarterly payout over the years, could become more attractive with the fed projected to cut interest rates soon.

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