Bear of the Day: International Business Machines (IBM)
For many large cap stocks, it has been a particularly brutal earnings season. We have seen recent weakness out of blue chips like McDonald’s (MCD) and Coca-Cola (KO), while International Business Machines (IBM) has also been a disappointment as well.
IBM is a very interesting case, as despite its global reach, it is really hit hard by company specific issues more than anything (though you could probably say that for MCD and KO to an extent as well). The giant company is having trouble adapting to a very different technology environment, and its shares are really starting to suffer as a result. This is especially true when investors examine the recent earnings report from the company and what this means for the outlook for ‘Big Blue’.
Recent Earnings
In the most recent report, IBM posted EPS of just $3.68, a nearly 15% miss compared to the consensus estimate of $4.30/share. This miss was so bad that it actually pulled the trailing four quarter average earnings surprise down into negative territory as well, suggesting that IBM is really facing some headwinds after this extremely negative report.
After all, revenues also came in below estimates, missing by just over one billion dollars, while the company abandoned its aggressive 2015 EPS target of $20 as well. To top things off, and to truly showcase how IBM has been doing lately, the company recently agreed to pay GlobalFoundries $1.5 billion to take its chip unit off its hands. They literally couldn’t give away the division!
Impact of Weakened Guidance & Huge Miss
As you might expect given the all-around bearishness of this report, IBM shares crumbled in the days immediately following the release. Shares were down about 7% after the report, while they have declined more than $30/share, down to roughly $160, in just the past few weeks alone.
The bad news might not end here though, as the sluggish report has forced analysts to slash their EPS estimates for IBM. In fact, not a single estimate has moved higher in the past two months for IBM stock, including 6 lower in the past seven days for the current year, and 12 lower in the past seven days for next year’s earnings period.
The magnitude of these revisions lower has also been pretty intense, as the consensus has crashed for all the time periods we look at for EPS levels. The current quarter has fallen from $6.85/share seven days ago to $5.51/share today, while the current year and next year consensus estimates have plunged by, respectively, 11% and 14%, in just the past week as well.
Bottom Line and Other Picks
Given these horrendous numbers and the general disdain for many mega caps as of late, it shouldn’t be too surprising to note that IBM has earned itself a Zacks Rank #5 (strong sell). This means that we are looking for more underperformance from this stock, and that we suggest investors look elsewhere in the near term.
While IBM’s industry of computer-integrated systems currently has a rank that is in the bottom 20%, there is one promising name in the space, Vasco Data Security (VDSI). Not only has this company recently moved from a Zacks Rank #3 to a Zacks Rank #2, but it beat EPS estimates by an impressive 200% last quarter as well.
So if you are looking for a better choice in this market, consider swapping out IBM for this small cap stock, as it has much better growth prospects and could continue to be a winner in today’s somewhat uncertain market environment.
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