All Eyes on IBM 1Q18 Earnings Show Tonight

Cantor's Joseph Foresi sets 1Q expectations from the sidelines on IBM, angling for some digit revenue growth for the quarter- but weakening margins.

As IBM (NYSE:IBM) clears the decks to post its first quarter financial performance for 2018 once the bell tolls, Cantor analyst Joseph Foresi braces for waning margins- even as he readies for a solid lift in Strategic Imperatives (SI) revenue gains. This segment has proved important in making up for weak spots for IBM and Foresi places significance here for SI to continue as the tech giant’s all-star amid falling legacy revenues.

As such, the analyst delivers a cautious earnings preview, reiterating a Neutral rating on IBM stock with a $152 price target, which implies a close to 6% downside from current levels.

For the first quarter, the analyst looks for a 5% year-over-year rise in revenue to $19.07 billion, more confident than FactSet consensus of $18.84 billion. Meanwhile, the analyst’s EPS expectations mirror the Street. IBM has factored in currency as a tailwind in its guide and Foresi anticipates a 4% jump here. By the fourth quarter of last year, revenues shot up 1% in constant currency (cc), which Foresi notes was the first sign of revenue growth from IBM in the last five years- thanks to a juiced-up mainframe refresh cycle. This refresh cycle should continue to lead revenues to surge for IBM, predicts Foresi, who sees this as a wave for Systems growth, especially for the new z14 system.

The Street is a bit more bullish than IBM’s own guide looking for a minimum of $13.80 in EPS, with the Street betting on $13.83. In comparison, Foresi stands right with IBM’s expectations at $13.80. While the analyst looks for margins to dip in the first quarter, he is encouraged for sequential progress throughout the rest of the year. For the full year of 2018, Foresi expects IBM can deliver $80.86 billion in revenue, ahead of FactSet consensus of $80.31 billion. Additionally, compared to consensus expectations looking for an adjusted operating margin of 18.6%, Foresi calls for 17.6%.

Foresi predicts, “IBM’s faster-growing Strategic Imperatives’ (SI) revenue growth accelerated in 4Q17 to high-double digits from the low-double digits in 3Q17. The SI have been offsetting continued declines in the rest of the business, and sustained double-digit growth in these revenues would help in the timing of an inflection point for a return to sustained overall growth. We expect margins to be down in 1Q18 y/y and decrease slight for the full year 2018 as well. 1Q18 results are expected to be boosted by the mainframe refresh cycle driving Systems (10% of revs) up 37% by our estimates, vs. +20% for the street. We look to results for an update on the outlook for 2018, the timing of a return to sustained organic growth (SI vs. core performance), boost from the mainframe refresh cycle), and the margin outlook.”

Moving forward, “Investors continue to look for signals of sustained overall organic growth and Strategic Imperatives will need to be the driver, as legacy revenues continue to decline,” concludes the analyst.

Joseph Foresi has a very good TipRanks score with an 83% success rate and a high ranking of #23 out of 4,774 analysts. Foresi garners 17.0% in his annual returns.

TipRanks indicates caution laced with positivity circling the tech giant’s shares. Out of 16 analysts polled in the last 3 months, 6 are bullish on IBM, 8 remain sidelined, while 2 are bearish on the stock’s prospects. With a return potential of 6%, the stock’s consensus target price stands at $171.00.

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