All Eyes on International Business Machines (IBM) 4Q Earnings Tonight

Cantor's Joseph Foresi highlights some positives in IBM's favor approaching tonight's quarterly results, but still sees more downside risk than upside gain to shares.


International Business Machines (NYSE:IBM) scored some momentum in its third quarter of 2017, and though Cantor analyst Joseph Foresi leans more towards the bears than the bulls in his 12-month target expectations, the analyst believes the tech company hopes to grow from this latest headway made.

Ahead of this evening’s fourth quarter showcase due after the bell, the analyst reiterates a Neutral rating on IBM stock with a $154 price target, which implies a nearly 9% downside from current levels. (To watch Foresi’s track record, click here)

“We expect slight revenue growth in the period, but a decline in constant currency,” writes Foresi, commenting: “IBM guided for currency to be a tailwind. We expect a 3% boost from currency. 3Q17 revenues fell by 1% cc, the company’s smallest decline this year. We expect revenues to get a boost from a refresh cycle for mainframes driving Systems growth, particularly for the new z14 system.”

For the fourth quarter, the analyst calls for 1.2% year-over-year growth in revenue to $22.02 billion, just under FactSet consensus of $22.04 billion. Regarding EPS, the analyst is more confident than the Street, angling for $5.22 against consensus of $5.15. The Street’s 2017 EPS aligns with IBM’s target, which Foresi believes suggests “margin expansion.” Consensus has expectations set for $13.80 compared to guidance anticipating $13.80 at the minimum. From Foresi’s perspective, IBM could pull in $13.84, which would require more substantial margin expansion than the Street is expecting for the fourth quarter. For 2017, Foresi anticipates $78.62 billion in full-year revenue, just under FactSet consensus of $78.64 billion, suggesting a year-over-year dip of 1.6%. For IBM’s adjusted operating margin, the analyst is slightly above consensus of 18.6%, betting on results of 18.8%.

Overall, “IBM’s faster-growing Strategic Imperatives’ (SI) revenue growth reaccelerated in 3Q17 to low double digits from the mid-to-high single-digits in 2Q17. 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 overall growth. We expect margins to be up in 4Q17 y/y and to expand in 2018 as well. We look to results for an update on the outlook for 2018, the timing of a return to organic growth (SI vs. core performance), commentary about recent news items (including a CFO change), and the margin outlook,” Foresi contends.

Glancing ahead to 2018, the Street angles for $78.8 billion in revenues from the tech company, with Foresi estimating $78.7 billion, as well as $13.88 in adjusted EPS (with Foresi looking $13.98). For now, the analyst believes investors will continue to search for indications of a comeback to sustained organic gains in the overall grand scheme.

TipRanks underscores optimism hovering above IBM shares with a majority consensus sticking to the sidelines. Out of 9 analysts polled in the last 3 months, 3 are willing to take the bullish gamble on the tech stock with 6 hedging their bets on the sidelines. With a return potential of nearly 3%, the stock’s consensus target price stands at $173.71.

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