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Can IBM Keep the Earnings Surprise Streak Alive in Q3?


International Business Machines IBM is set to report third-quarter fiscal 2018 results on Oct 16. Notably, the company surpassed the Zacks Consensus Estimate in the trailing four quarters with an average beat of 1.13%.

IBM’s growing presence in the enterprise artificial intelligence (“AI”) market on the back of an increasing clientele bodes well. Moreover, the company is benefiting from strong demand for z14 Mainframe and Power products. Its improving clout in the cloud, security and analytics remains a tailwind.

Additionally, blockchain has steadily gained prominence and is an integral part of IBM’s product offerings. Notably, the company is part of more than 400 blockchain client engagements.

Factors Influencing Q3 Results

For third-quarter 2018, the Zacks Consensus Estimate for IBM’s earnings is projected to be $3.40 per share representing an increase of 0.4% year over year. However, total revenues are anticipated to be $19.1 billion, reflecting a decline of approximately 0.3% from the year-ago quarter.

IBM’s significant investments in “Strategic Imperatives” — cloud computing, mobile, analytics, cognitive technologies and security is a tailwind.

In the second quarter, Strategic Imperatives revenues advanced 13% on a year-over-year basis to $10.1 billion.

IBM’s solid security portfolio is aiding it in winning clients on a regular basis. Security revenues surged 79%, driven by strong demand for the pervasive encryption of IBM Z, and growth in integrated software and services business.

The company is focusing on cloud computing which is evident from the 60 data centers across 18 availability zones, globally. Notably, cloud revenues surged 18% from the year-ago quarter in the last reported quarter to $4.7 billion.

Coming to Systems, the segment comprises both hardware and operating systems software revenues. Broad-based adoption of the z14 mainframe, power systems and strong flash sales remain key catalysts for the segment.

In the second quarter, Systems revenues surged 24.6% on a year-over-year basis to $2.18 billion. The Zacks Consensus Estimate for the third quarter is pegged at $1.91 billion.

Robust performance from security and analytics offerings is expected to encourage Cognitive Solutions revenues in the to-be-reported quarter.

Cognitive Solutions’ revenues-external increased 0.5% year over year (down 1.3% at cc) to $4.58 billion in the second quarter. The Zacks Consensus Estimate is currently $4.32 billion for the third quarter.

Additionally, in the second quarter, revenues from Global Business Services-external segment were $4.19 billion, up 2.3% from the year-ago quarter primarily driven by growth in digital consulting offerings. The Zacks consensus estimate for the third quarter is pegged at $4.11 billion.

In the second quarter IBM’s signings increased 6% to $11.5 billion with 13 deals above $100 million. However, the Zacks consensus estimate for the third quarter is pegged at $9.2 billion.

Notable Developments

IBM’s advanced AI, Internet of Things (IoT), blockchain, cloud, machine learning (ML) capabilities, among others makes its offerings well poised to gain robust adoption.

The traction witnessed by the company’s Watson offerings and IBM Cloud is expected to boost the top line.

The company ramped up Watson solutions aimed at accelerating artificial intelligence (AI) development. These solutions will cater to nine industries which include agriculture, customer service, human resources, supply chain, manufacturing, building management, automotive, marketing and advertising.

During the third quarter, IBM also entered into a five-year deal worth AU$1 billion with the Australian government to become its technology partner.

While these developments are expected to positively impact results, weakness in Cognitive, GBS and Signings remains a concern. Moreover continued investments on the development of IBM Cloud might limit margin expansion.

What the Zacks Model Unveils

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

IBM has a Zacks Rank #4 (Sell) and an Earnings ESP of -0.68%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

International Business Machines Corporation Price and EPS Surprise

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

Stocks with Favorable Combination

Here are a few stocks that are worth considering as our model shows that these have the right combination of elements to deliver an earnings beat in the upcoming releases.

Badger Meter BMI has an Earnings ESP of +4.88% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

W.W. Grainger GWW has an Earnings ESP of +0.98% and a Zacks Rank #1.

ADTRAN ADTN has an Earnings ESP of +33.33% and a Zacks Rank #2.

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