International Business Machines Corp. (IBM Quick QuoteIBM - Free Report) is set to report second-quarter 2016 results on Jul 18, after the market closes. Last quarter, it posted a positive earnings surprise of 12.44%. Over the past four quarters, the company has posted an average positive earnings surprise of 3.87%. Let’s see how things are shaping up for this announcement.

Factors at Play

There hasn’t been much change in IBM’s fortunes in 2016. The last reported quarter was Big Blue’s 16^th straight quarter of revenue decline. The company is still in the process of a long drawn business transition to higher-growth markets that are not yielding enough to offset declines in traditional segments. Further, sluggish IT spending particularly on on-premise and data center hardware along with increasing competition remains an added concern.

Heightened fundamental risks emanating from Brexit results will also add to woes as IBM generates one-third of its revenues from Europe. IBM has long been grappling with currency volatility and now with the British pound falling against dollar, the impact on revenues from the region continues to be in a limbo.

Nevertheless, IBM's strategic growth initiatives, including its Big Data & business analytics, cloud computing, mobile and social business continue to hold promise. From the last reported quarter, the company has changed its reporting segments to provide a better insight into the company’s “Strategic Imperatives” performance. 

In the last reported quarter, revenues from “Strategic Imperatives” grew 14% year over year to $7 billion and in the trailing 12 months, the company’s initiatives have generated about $29.8 billion in revenues.

As per an Apr 2016 IDC report, cloud IT infrastructure spending is expected to grow at a 5-year CAGR of 12.5%, hitting $57.8 billion by 2020. IDC estimates cloud IT infrastructure spending to be 47.9% of total expenditure on enterprise IT infrastructure by 2020. All these spell big opportunity for IBM.

In addition, IBM’s policy of making strategic acquisitions (over 150 companies since 2000) will lead to incremental revenues, strengthening its technology leadership and resulting in a more favorable mix of business. The acquisitions have also increased its scale of operations globally. This year IBM has made 10 acquisitions so far, which include Bluewolf Group, Resilient Systems, Truven Health Analytics, Optevia and The Weather Company’s B2B, mobile and cloud-based web-properties. Strong cash flow generation is expected to provide the required financial flexibility for strategic investments amid a changing business environment.

Earnings Whispers

Our proven model does not conclusively show that IBM is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: IBM has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $2.87.

Zacks Rank: IBM’s Zacks Rank #3 increases the predictive power of ESP but we need to have a positive ESP to be confident of an earnings surprise.

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some stocks worth considering that, as per our model, have the right combination of elements to post an earnings beat this quarter:

QUALCOMM Incorporated (QCOM Quick QuoteQCOM - Free Report) with Earnings ESP of +3.61% and a Zacks Rank #2.

Intel Corporation (INTC Quick QuoteINTC - Free Report) with Earnings ESP of +5.66% and a Zacks Rank #2

Amazon.com, Inc. (AMZN Quick QuoteAMZN - Free Report) with Earnings ESP of +37.72% and a Zacks Rank #3

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