IBM Earnings Miss Could Trouble These ETFs

International Business Machines (IBM), the world’s largest computer-services provider, dampened investors’ mood on Monday after it reported lackluster third-quarter results yesterday. The company fell short of our estimates on both the top and bottom lines with revenues declining for the tenth consecutive quarter on a year-over-year basis.

Further, the company slashed its 2014 earnings per share guidance and dropped its 2015 guidance, citing weak consumer spending and a slump in software sector.

IBM Results in Detail

Revenues dropped 4% year over year to $22.4 billion missing the Zacks Consensus Estimate of $23.5 billion. Earnings per share came in at $3.68, well below our estimate of $4.30 and down 10% from the year-ago quarter. Almost all of the company’s operating segments saw weak revenue growth driven by sluggish demand in BRIC countries.

In addition, the strength in U.S. dollar added to the woes. IBM expects currency headwind to remain a major drag on both revenue and profitability in the ongoing quarter as well as in 2015. The company is facing some hurdles in transforming its traditional business to strategic growth areas including cloud computing, big data and mobile security (see: all the Technology ETFs here).

As such, IBM now expects earnings per share to fall 2–4% in 2014 from $16.64 reported last year. This is much lower than the company’s previous guidance of at least $18.00 and the Zacks Consensus Estimate of $17.91. Moreover, the company no longer targets earnings of $20 per share for 2015.

Market Impact

The shares of IBM fell to a three-year low, tumbling as much as 8.4% on the day following the earnings announcement on heavy volume of more than six times the normal. The price drop has pushed its market capitalization down to nearly $168 billion, bringing IBM to the nineteenth position in the S&P 500 from the top 10 companies in the index.

Moreover, the company will pay $1.5 billion to GlobalFoundries over the next three years to shed its loss-making semiconductor unit. This news also spread negative sentiments on the company’s future growth as divestiture generally fetches money for the company but in this case, IBM has to pay for the divestiture (read: Semiconductor ETFs in Focus After Friday's Rout).

All these suggest that more pain is in store for this tech giant in the coming months, compelling investors to move away from the stock at present. Further, the stock has a Zacks Rank #3 (Hold) and has a poor Zacks Industry Rank (in the bottom 29%). Given this, ETFs with the highest allocation to this tech giant is in focus for the days ahead. Investors should closely monitor the movement in these funds and avoid these if the stock drags them down in the coming months:

ETFs to Watch

First Trust NASDAQ Technology Dividend Index Fund (TDIV)

This fund provides exposure to the dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index. The product has amassed about $672.5 million in its asset base while trades in volume of more than 153,000 shares per day. The ETF charges 50 bps in annual fees.

In total, the fund holds about 97 securities in its basket. Of these firms, IBM takes the third spot, making up roughly 8.2% of the assets. In terms of industrial exposure, the fund allocates one-fifth portion in semiconductor and semiconductor equipment, followed by technology hardware, storage & peripherals (16.7%) and software (16.2%). The fund has returned about 5.6% so far this year.

SPDR Dow Jones Industrial Average ETF (DIA)

This fund follows the Dow Jones Industrial Average, providing exposure to 31 blue-chip U.S. stocks. IBM occupies the second position in the basket with 7.13% share. The ETF is well spread out across number of sectors with information technology, industrials and financials taking the top three spots (read: 3 Mega Cap ETFs Beating the Market).

DIA is one of the largest and most popular ETF in the space with AUM of $11 billion and average daily volume of more than 5.2 million shares. The fund charges 17 bps in annual fees and expenses. The product is almost flat in the year-to-date time frame.

iShares Dow Jones US Technology ETF (IYW)

This ETF tracks the Dow Jones US Technology Index, giving investors exposure to the broad technology space. The fund holds 146 stocks in its basket with AUM of $3.9 billion while charging 43 bps in fees and expense. Volume is moderate as it exchanges nearly 439,000 shares in hand a day.

IBM occupies the third position in the basket with 5.35% of assets. The product is heavily skewed toward the technology hardware and equipment segments, as these make up for half of the portfolio. Software and computer services take the remaining portion in the basket. The fund has added nearly 8% in the year-to-date time frame.

Market Vectors Morningstar Wide Moat ETF (MOAT)

This fund provides equal weighted exposure to 22 securities having sustainable competitive advantages by tracking the Morningstar Wide Moat Focus Index. Here, IBM takes the ninth spot at 5.03% (read: Best ETF Strategies for the Fourth Quarter).

The product is also diversified across various segments with the top four sectors – information technology, energy, consumer staples and consumer discretionary – accounting for double-digit exposure. The fund has amassed $843.7 million in its asset base while trades in good volume of about 138,000 shares. Expense ratio came in at 0.49%. MOAT added 4.5% so far this year.

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