International Business Machines Corp. IBM is set to report first-quarter 2015 results on Apr 20, after the market closes. Last quarter, it posted a positive earnings surprise of 7.39%. However, over the past four quarters the company posted an average earnings surprise of negative 1.70%. Let’s see how things are shaping up for this announcement.
Factors at Play
IBM's growth initiatives, including its Big Data & business analytics, cloud computing, mobile and social business are expected to drive growth. However, it continues to struggle in transforming its business from primarily hardware to software and services, which is hampering business growth.
As a result, IBM is focusing more on analytics and cloud-computing to combat a massive slowdown in hardware sales and persistent softness in traditional software. The company recently opened a data center in Germany under the $1.2 billion investment plan to extend its cloud footprint worldwide.
As part of this transition, IBM partnered with several industry majors such as Twitter TWTR and Microsoft MSFT to offer cloud base solutions, which should boost first-quarter results.
However, intensifying competition in the industry remains a major headwind. Further, sluggish IT spending particularly on on-premise and data center hardware will remain an overhang on the to-be-reported quarter results.
Earnings Whispers
Our proven model does not conclusively show that IBM is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: IBM has an Earnings ESP of -3.47%. This is because the Most Accurate estimate stands at $2.78, while the Zacks Consensus Estimate is pegged at $2.88.
Zacks Rank: Though IBM’s Zacks Rank #3 (Hold) increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
A company that according to our model has the right combination of elements to post an earnings beat this quarter is Apple Inc. AAPL, with an Earnings ESP of +6.05% and a Zacks Rank #2 (Buy).
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