International Business Machines Corporation (IBM) is a trending stock: facts to know before you bet on it
IBM (IBM) is one of the most viewed stocks by visitors to Zacks.com lately. So it might be worth looking at some of the factors that could affect the stock’s short-term performance.
Shares of this technology and consulting company have returned -3% over the past month compared to the -6.5% change in the Zacks S&P 500 composite. The industry Zacks Computer – Integrated Systems, to which IBM belongs , lost 4.9% over this period. Now the key question is: where could the stock be heading in the near term?
Although media reports or rumors of a material change in a company’s business outlook usually cause its stock to trend and result in an immediate price change, there are always certain fundamental factors that ultimately determine the buy and hold decision.
Revisions to earnings estimates
At Zacks, we prioritize evaluating change in a company’s future earnings projection over anything else. This is because we believe that the present value of its future income stream is what determines the fair value of its stock.
Our analysis is primarily based on how sell-side analysts covering the stock revise their earnings estimates to reflect the latest trading trends. When a company’s earnings estimates increase, the fair value of its stock also increases. And when the fair value of a stock is higher than its current market price, investors tend to buy the stock, causing its price to rise. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term movements in stock prices.
For the current quarter, IBM is expected to post earnings of $1.78 per share, indicating a -29.4% change from the prior year quarter. The Zacks consensus estimate has changed by +0.1% over the past 30 days.
For the current fiscal year, the consensus earnings estimate of $9.33 indicates a change of +17.7% from the prior year. Over the last 30 days, this estimate has changed by -1.1%.
For the next fiscal year, the consensus earnings estimate of $10.07 indicates a change of +8% from what IBM is expected to report a year ago. Over the past month, the estimate has changed by +0.2%.
With an impressive externally audited track record, our proprietary stock rating tool – the Zacks Ranking – is a more conclusive indicator of a stock’s short-term price performance, as it effectively harnesses the power of earnings estimate revisions. . The magnitude of the recent change in the consensus estimate, along with three other factors related to earnings estimates, resulted in a Zacks No. 4 (sales) ranking for IBM.
The chart below shows the evolution of the company’s consensus 12-month EPS estimate:
12 month EPS
Revenue Growth Forecasts
Although earnings growth is arguably the most superior indicator of a company’s financial health, nothing as such happens if a company is unable to increase its revenue. After all, it is almost impossible for a company to increase its profits for an extended period of time without increasing its revenue. It is therefore important to know the potential revenue growth of a business.
For IBM, the consensus sales estimate for the current quarter of $13.75 billion indicates a year-over-year change of -22%. For the current and future fiscal years, the estimates of $59.9 billion and $61.16 billion indicate variations of -15.4% and +2.1%, respectively.
Latest reported results and history of surprises
IBM reported revenue of $15.54 billion in the latest quarter, representing a year-over-year change of -17.1%. EPS of $2.31 for the same period versus $2.33 a year ago.
Compared to the Zacks consensus estimate of $15.12 billion, reported revenue is a surprise +2.75%. The EPS surprise was +0.87%.
In the past four quarters, IBM has exceeded consensus EPS estimates three times. The company has exceeded consensus earnings estimates twice during this period.
No investment decision can be effective without considering the valuation of a stock. Whether a stock’s current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects is a key determinant of its future price performance.
Compare the present value of a company’s valuation multiples, such as its price/earnings (P/E), price/sales (P/S), and price/cash flow (P/CF), to its own historical values help determine whether its stock is fairly valued, overvalued or undervalued, while comparing the company against its peers on these metrics gives a good idea of the reasonableness of its price.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to traditional and unconventional valuation metrics to rank stocks from A to F (an A is better than a B; a B is better than a C; and so on), is quite useful in determining whether a stock is overvalued, correctly priced, or temporarily undervalued.
IBM is rated C on this front, indicating that it is trading at par with its peers. Click here to see values for some of the rating metrics that led to this rating.
The facts discussed here and plenty of other information about Zacks.com might help determine whether or not it’s worth paying attention to the market buzz about IBM. However, its Zacks No. 4 ranking suggests it may underperform the broader market in the near term.
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International Business Machines Corporation (IBM): Free Inventory Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.