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Soft spending on enterprise software could set up a big challenge for International Business Machines Inc. in 2020, so how Big Blue spins its forecast for the year will carry a lot of weight when the company reports earnings.
IBM IBM, +0.60% is scheduled to report fourth-quarter earnings after the market close Tuesday.
Recently, Evercore ISI analyst Amit Daryanani gave IBM a “no drama downgrade” to in-line from outperform and lowered his price target to $145 from $160 because he sees the company having a tough first half of 2020 along with fewer share repurchases because of debt.
With the bulk of the company’s fortunes riding on business software, Daryanani noted that the space itself is undergoing a tough business environment citing recent comments from companies like Cisco Systems Inc. CSCO, +0.46%, Dell Technologies Inc. DELL, -0.49%, Hewlett Packard Enterprise Co. HPE, -0.32% , and NetApp Inc. NTAP, +0.64%
Earnings: Of the 18 analysts surveyed by FactSet, IBM on average is expected to post adjusted earnings of $4.69 a share, down from the $4.70 a share expected at the beginning of the quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $4.71 a share.
Revenue: Wall Street expects revenue of $21.64 billion from IBM, according to 15 analysts polled by FactSet. That’s down from the $22.07 billion forecast at the beginning of the quarter and the $21.76 billion reported in the year-ago quarter. Estimize expects revenue of $21.69 billion.
Analysts surveyed by FactSet expect global technology services revenue of $7 billion from IBM. Analysts also expect cloud and cognitive software revenue of $7.14 billion from IBM, along with global business services revenue of $4.27 billion, and systems revenue of $2.83 billion.
Stock movement: IBM shares are down 3.5% since the company’s last earnings report in October, when its revenue was shy of Wall Street estimates. In comparison, the Dow Jones Industrial Average DJIA, +0.32% has advanced 7.6%, the S&P 500 index SPX, +0.19% has increased 10%, and the tech-heavy Nasdaq Composite Index COMP, +0.08% has gained 14%.
What analysts are saying: Of the 20 analysts who cover IBM, five have buy or overweight ratings, 13 have hold ratings and two have sell or underweight ratings, with an average price target of $148.53.
“While IBM remains an appealing asset in a Hybrid First era and >4% dividend yield will provide support, we think skewed expectations for Dec-qtr and broadly CY20 create downside risk to street estimates and keep the stock rangebound,” Evercore’s Daryanani said.
Instinet analyst Jeffrey Kvaal, who has a buy rating and a $170 target price, had a slightly more optimistic view of IBM going into 2020, expecting “modest organic growth” over the year, with Red Hat, cloud and cognitive, global business services, and mainframes all rising, even as global technology services remain a drag.
Red Hat was acquired for about $34 billion by IBM in July in a deal that was announced more than a year ago.
Kvaal expects above-consensus 2020 earnings of $13.40 a share, but said the real focus should be 2021.
“We believe investors should focus on IBM’s EPS potential in 2021, which we forecast ~9% growth to $14.60; consensus models ~$14.30,” Kvaal said. “We believe key drivers are RedHat accretion, continued growth in core IBM, and lower interest expense as debt levels improve.”
