IBM (IBM) is one of the stocks most watched by Zacks.com visitors lately. So, it might be a good idea to review some of the factors that might affect the near-term performance of the stock.
Shares of this technology and consulting company have returned +3.9% over the past month versus the Zacks S&P 500 composite’s +1.7% change. The Zacks Computer – Integrated Systems industry, to which IBM belongs, has gained 8.6% over this period. Now the key question is: Where could the stock be headed in the near term?
Although media reports or rumors about a significant change in a company’s business prospects usually cause its stock to trend and lead to an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.
Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company’s earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.
We essentially look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates go up for a company, the fair value for its stock goes up. A higher fair value than the current market price drives investors’ interest in buying the stock, leading to its price moving higher. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
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For the current quarter, IBM is expected to post earnings of $2.64 per share, indicating a change of +8.6% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.
The consensus earnings estimate of $10.95 for the current fiscal year indicates a year-over-year change of +6%. This estimate has remained unchanged over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $11.66 indicates a change of +6.5% from what IBM is expected to report a year ago. Over the past month, the estimate has remained unchanged.
With an impressive externally audited track record, our proprietary stock rating tool — the Zacks Rank — is a more conclusive indicator of a stock’s near-term price performance, as it effectively harnesses the power of earnings estimate revisions. The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for IBM.
Story Continues
The chart below shows the evolution of the company’s forward 12-month consensus EPS estimate:
12-month consensus EPS estimate for IBM
Even though a company’s earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It’s almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company’s potential revenue growth is crucial.
In the case of IBM, the consensus sales estimate of $16.59 billion for the current quarter points to a year-over-year change of +5.2%. The $66.21 billion and $69.38 billion estimates for the current and next fiscal years indicate changes of +5.5% and +4.8%, respectively.
IBM reported revenues of $14.54 billion in the last reported quarter, representing a year-over-year change of +0.5%. EPS of $1.6 for the same period compares with $1.68 a year ago.
Compared to the Zacks Consensus Estimate of $14.45 billion, the reported revenues represent a surprise of +0.66%. The EPS surprise was +12.68%.
The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates two times over this period.
No investment decision can be efficient without considering a stock’s valuation. Whether a stock’s current price rightly reflects the intrinsic value of the underlying business and the company’s growth prospects is an essential determinant of its future price performance.
Comparing the current value of a company’s valuation multiples, such as its price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its own historical values helps ascertain whether its stock is fairly valued, overvalued, or undervalued, whereas comparing the company relative to its peers on these parameters gives a good sense of how reasonable its stock price is.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
IBM is graded D on this front, indicating that it is trading at a premium to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.
The facts discussed here and much other information on Zacks.com might help determine whether or not it’s worthwhile paying attention to the market buzz about IBM. However, its Zacks Rank #3 does suggest that it may perform in line with the broader market in the near term.
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International Business Machines Corporation (IBM) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
