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Play IBM's Turnaround Story With These ETFs

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After the closing bell on Tuesday, International Business Machines (IBM - Free Report) cheered up investors with third-quarter 2017 results. The world’s largest computer-services provider continued its streak of earnings beat for the twelfth consecutive quarter.

Plus, the company offered positive surprise on the revenue front, snapping the previous two quarters’ losing trail. The company also gave cues of sales growth after about “six years of decline”. This suggests that the company’s turnaround story is probably knocking on the door.

The company saw revenue figures of $19.15 billion, flat year over year but ahead our consensus estimate of $18.67 billion. IBM recorded earnings of $3.30 per share (excluding 38 cents from non-recurring items), beating the Zacks Consensus Estimate of $3.28 per share. Earnings per share were flat year over year.

IBM’s cloud revenues surged 20% in the quarter to hit $4.1 billion. Revenues from analytics increased 5%, while mobile sales grew 7%. If these were not enough, IBM’s security sector revenues skyrocketed 51% (read: Why Cloud ETFs Could Soar Ahead).

Promising Outlook

For 2017, the company reaffirmed its earnings per share guidance of at least $13.80. IBM sees free cash flow to be flat year to year. Continued growth in cloud and its investments in other strategic imperatives will be instrumental in IBM’s story. The launch of its new z Systems mainframe will give some traction to the company’s growth ahead. Revenues in the mainframe business shot up 60% in the third quarter.

As per a source, IBM expects revenues to grow $2.8 billion to $2.9 billion sequentially in the fourth quarter, which will take fourth-quarter revenues to $22—$22.1 billion, marking “year-over-year growth of about 1.4% at the high end.”

Following the revenue beat and signs of a turnaround, shares of IBM added 5.6% in aftermarket hours yesterday. This could be an attractive entry point for investors given that IBM has a Value Score of A. Its Zacks Sector Rank is in the top 19%. The dividend yield of the stock was solid at 4.09% as of Oct 17, 2017 (read: 5 Cheap Dividend ETFs for an Uncertain Market).

ETFs to Watch

Given this, ETFs with the highest allocation to this tech giant will be in focus. Investors should closely monitor the movement in these funds and tap the opportunity whenever it arises (see: all the Technology ETFs here):

First Trust NASDAQ Technology Dividend Index Fund (TDIV - Free Report)

This fund provides exposure to dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index. The product has amassed about $739.6 million in its asset base while trading in volume of around 81,000 shares per day. It charges 50 bps in annual fees and holds about 95 securities in its basket.

Of these firms, IBM takes the fourth spot, making up roughly 7.91% of the assets. In terms of industrial exposure, the fund allocates more than one-fourth portion in semiconductor and semiconductor equipment, followed by software (14.5%), technology hardware, storage & peripherals (11.9%) and diversified telecom services (11.4%).

SPDR Dow Jones Industrial Average ETF (DIA - Free Report)

This fund follows the Dow Jones Industrial Average, providing exposure to 30 blue-chip U.S. stocks. IBM occupies the eighth position in the basket with 4.4% share. The ETF is well spread out across a number of sectors with industrials, information technology, financials, consumer discretionary and health care taking the top five spots with a double-digit exposure each.

DIA is one of the largest and most popular ETFs in the space with AUM of $19 billion and average daily volume of around 3.1 million shares. It charges 17 bps in annual fees from investors and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Here's Why Dow Jones ETFs are Moving North).

Ultra Dividend Revenue ETF (RDIV - Free Report)

The $510.9-million fund invests about 5% in its second holding IBM. The fund charges about 39 bps in fees. The fund holds about 62 stocks in its portfolio. It has a Zacks ETF Rank #3.

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