IBM (IBM) has recently been on Zacks.com’s list of the most searched stocks. Therefore, you might want to consider some of the key factors that could influence the stock’s performance in the near future.
Over the past month, shares of this technology and consulting company have returned +8.4%, compared to the Zacks S&P 500 composite’s +3.4% change. During this period, the Zacks Computer – Integrated Systems industry, which IBM falls in, has gained 5.4%. The key question now is: What could be the stock’s future direction?
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.
Here at Zacks, we prioritize appraising the change in the projection of a company’s future earnings over anything else. That’s because we believe the present value of its future stream of earnings is what determines the fair value for its stock.
Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock’s fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
For the current quarter, IBM is expected to post earnings of $2.43 per share, indicating a change of +5.7% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.1% over the last 30 days.
For the current fiscal year, the consensus earnings estimate of $11.12 points to a change of +7.7% from the prior year. Over the last 30 days, this estimate has changed +0.3%.
For the next fiscal year, the consensus earnings estimate of $11.93 indicates a change of +7.3% from what IBM is expected to report a year ago. Over the past month, the estimate has changed +0.6%.
Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock’s price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, IBM is rated Zacks Rank #2 (Buy).
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
While earnings growth is arguably the most superior indicator of a company’s financial health, nothing happens as such if a business isn’t able to grow its revenues. After all, it’s nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it’s important to know a company’s potential revenue growth.
For IBM, the consensus sales estimate for the current quarter of $16.08 billion indicates a year-over-year change of +7.4%. For the current and next fiscal years, $66.75 billion and $69.68 billion estimates indicate +6.4% and +4.4% changes, respectively.
IBM reported revenues of $16.98 billion in the last reported quarter, representing a year-over-year change of +7.7%. EPS of $2.8 for the same period compares with $2.43 a year ago.
Compared to the Zacks Consensus Estimate of $16.58 billion, the reported revenues represent a surprise of +2.4%. The EPS surprise was +6.06%.
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.
While comparing the current values of a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock’s price.
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 #2 does suggest that it may outperform 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).
