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IBM Q3 Earnings to Gain From Cloud & Analytics, FX Tailwind

Zacks

International Business Machines Corporation IBM is set to report third-quarter 2017 earnings results on Oct 17.

We expect IBM’s expanding cloud & analytics portfolio, which is helping the company win customers, and drive top-line growth in the quarter. Moreover, anticipated sales from the new mainframe product along with weak U.S. dollars are significant tailwinds.

Cloud, Analytics & z14: Key Catalysts

IBM is witnessing a tough period, primarily due to its ongoing business model transition to cloud, which is heavily time consuming. The top-line growth is expected to remain sluggish in the third quarter due to seasonality.

However, we expect the cloud, which increased 17% at constant currency in the previous quarter, to drive growth. Cloud included in the Cognitive Solutions (including Watson) and Global Business Services (GBS) soared 24% and 39% at constant currency, respectively.

IBM’s focus on cloud computing is evident from the fact that it continues to open data centers aggressively. Globally, the company owns 60 data centers across 19 countries.

International Business Machines Corporation Price and EPS Surprise


International Business Machines Corporation Price and EPS Surprise | International Business Machines Corporation Quote

The newly opened data centers (two in London, one in San Jose and one in Sydney) are equipped with the required cloud infrastructure to help clients develop cognitive artificial intelligence (AI), Internet of Things (IoT) and blockchain solutions.

This is expected to improve IBM’s competitive position in the cloud computing market currently dominated by Amazon Web Services and Microsoft Corporation MSFT.

In recent times, IBM’s cloud-based offerings have been selected by the likes of Syniverse, State of Arizona, Codify Academy, Italian airport operator SEA and Germany-based leading automotive supplier Faurecia.

IBM also remains a preferred choice for federal projects. The U.S. Army's Logistics Support Activity (LOGSA) awarded the company a contract to continue providing cloud services, software development and cognitive computing worth $135 million.

Notably, the Zacks Consensus Estimates for the Cognitive Solutions and GBS are currently pegged at $4.81 billion and $4.06 billion, respectively.

We also note that IBM began shipment of its z14 mainframe in September. The server market rebound in the second-quarter, as reported by Gartner and International Data Corporation (“IDC”) bodes well for the company.

Why a Likely Positive Surprise?

Our proven model shows that IBM is likely to beat earnings because it has the right combination of two important ingredients.

Zacks ESP: IBM’s Earnings ESP is +0.71%. This is because the company’s Most Accurate estimate is $3.30, while the Zacks Consensus Estimate is pegged lower at $3.28. A favorable ESP serves as a meaningful and leading indicator of a likely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: IBM currently has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 has a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of IBM’s Zacks Rank #3 and +0.71% ESP makes us reasonably optimistic of an earnings beat.

Stocks to Consider

Here are a couple of stocks, which, as per our model, have the right combination of elements to post an earnings beat this quarter:

Yelp Inc YELP, has an Earnings ESP of +100% and flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Extreme Networks Inc EXTR has an Earnings ESP of +9.75% and boasts a Zacks Rank #1.

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