IBM (IBM) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock’s performance in the near term.
Shares of this technology and consulting company have returned +2.6% over the past month versus the Zacks S&P 500 composite’s +4.7% change. The Zacks Computer – Integrated Systems industry, to which IBM belongs, has gained 2.3% 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.
Revisions to Earnings Estimates
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.
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.
IBM is expected to post earnings of $1.35 per share for the current quarter, representing a year-over-year change of -23.7%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.
For the current fiscal year, the consensus earnings estimate of $10.09 points to a change of +27.2% from the prior year. Over the last 30 days, this estimate has remained unchanged.
For the next fiscal year, the consensus earnings estimate of $10.92 indicates a change of +8.3% from what IBM is expected to report a year ago. Over the past month, the estimate has remained unchanged.
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 #3 (Hold).
The chart below shows the evolution of the company’s forward 12-month consensus EPS estimate:
12 Month EPS
Projected Revenue Growth
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 $13.81 billion indicates a year-over-year change of -22.1%. For the current and next fiscal years, $60.55 billion and $63.13 billion estimates indicate -14.5% and +4.3% changes, respectively.
Last Reported Results and Surprise History
IBM reported revenues of $16.7 billion in the last reported quarter, representing a year-over-year change of -18%. EPS of $3.35 for the same period compares with $2.07 a year ago.
Compared to the Zacks Consensus Estimate of $17.52 billion, the reported revenues represent a surprise of -4.7%. The EPS surprise was -1.18%.
Over the last four quarters, IBM surpassed consensus EPS estimates three times. The company topped consensus revenue estimates two times over this period.
Without considering a stock’s valuation, no investment decision can be efficient. In predicting a stock’s future price performance, it’s crucial to determine whether its current price correctly reflects the intrinsic value of the underlying business and the company’s growth prospects.
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.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to grade stocks from A to F (an An is better than a B; a B is better than a C; and so on), is pretty helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
IBM is graded A on this front, indicating that it is trading at a discount 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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