Shares of IBM (IBM - Free Report) climbed on Monday, just one day before the company is scheduled to report its first quarter financial results. This might signal that investors are confident about IBM heading into Tuesday’s Q1 earnings release. Let’s find out if they should be.
IBM’s stock price is down nearly 8% over the last year as investors assess the historic tech firm’s future. The company has slowly turned much of its focus toward growth areas such as artificial intelligence in order to better compete with the likes of Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , and Microsoft (MSFT - Free Report) . These forward-looking initiatives helped IBM post year over year revenue growth in the fourth quarter after reporting 22 consecutive quarters of declining revenues.
With that said, last quarter’s performance doesn’t mean IBM is poised to keep on rolling. Therefore we need to dive into some of IBM’s current estimates to see if investors should consider buying IBM stock ahead of Q1 earnings.
Latest Outlook and Valuation
Our current Zacks Consensus Estimates are calling for IBM to report revenues of $18.71 billion. This would mark 3% growth from the year-ago period and mark back to back quarters of sales growth. IBM’s earnings are projected to climb by 0.42% to reach $2.39 per share.
It is also worth pointing out that IBM’s earnings estimates have been trending higher recently, adding 2 cents within the last seven days.
Of course, earnings and revenue are just two of the many things investors will be concerned with when IBM reports after the closing bell on Tuesday.
We can also turn to our exclusive non-financial metrics consensus estimate file to prepare.
The Zacks Consensus NFM file contains detailed estimate data for business segment metrics and non-financial metrics reported by companies. The data is acquired from digest and contributing broker models and includes the independent research of expert stock market analysts.
According to these consensus estimates, IBM is on track to post revenue of $4.88 billion in its Cognitive Solutions sector. This would mark growth of roughly 5.2% year over year. Meanwhile, IBM’s Technology Services division is expected to post $8.43 billion in revenue, which would represent a marginal climb from the year-ago period.
Heading into Monday, IBM was trading with a Forward P/E of 11.3, which is almost directly in line with the “Computer - Integrated Systems” industry’s average of 11.2. Within the past year, the stock has traded as high as 12.2x forward 12-month earnings and as low as 10.1x. Its median earnings multiple over that time is 11.4x, which means IBM currently presents the slightest of discounts to where it has traded at for much of the last year.
Earnings ESP Whispers
Investors will also want to anticipate the likelihood that IBM surprises investors with better-than-anticipated earnings results. For this, we turn to our Earnings ESP figure.
Zacks Earnings ESP (Expected Surprise Prediction) looks to find earnings surprises by focusing on the most recent analyst estimates. This is done because, generally speaking, when an analyst posts an estimate right before an earnings release, it means that they have fresh information which could potentially be more accurate than what analysts thought about a company two or three months ago.
A positive Earnings ESP paired with a Zacks Rank #3 (Hold) or better ranking helps us feel confident about the potential for an earnings beat. In fact, our 10-year backtest has revealed that this methodology has accurately produced a positive surprise 70% of the time.
IBM is currently a Zacks Rank #3 (Hold) and sports an Earnings ESP of 0.0%. This means that the most recent analyst estimates have been in line with our IBM consensus. Therefore, our model does not conclusively call for an earnings beat.
IBM’s earnings surprise history and the effect that these surprises have had on IBM’s share prices are two other important factors to consider ahead of the company’s Q1 earnings report.
The company has topped earnings estimates for the trailing six quarters, but these beats have not necessarily led to positive momentum immediately following IBM’s earnings release.
We judge the price effect of these earnings beats by comparing the closing price of the stock two days before the report and two days after the report. Over the course of IBM’s streak, the stock has turned negative in four out of these six windows.
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