- IBM is expected to report fourth-quarter adjusted earnings of $3.59 per share after the market closes on Wednesday.
- Revenue is expected to decline 2% on a constant currency basis.
- The stock outperformed all large-cap tech in 2022 thanks to IBM’s defensive position.
- Big Blue relies primarily on recurring revenue from managing core computer systems and networks for large enterprise clients.
Information technology provider IBM (IBM) heads into its earnings report after Wednesday’s closing bell handily outperforming glitzy tech bellwethers in the past year, an unusual position for a technology pioneer that has long lagged significantly in returns.
IBM to report fourth quarter adjusted earnings $3.59 a share, up from $3.35 a share a year earlier, while revenue could fall 2% to $16.4 billion, according to analysts’ estimates compiled by Visible Alpha.
IBM’s defensive position as a provider of core business IT software and services with a high share of recurring revenue has boosted the stock price, but it will be tested by the recent slowdown in technology spending.
The stock has gained nearly 10% over the past year, compared with a 13% decline in the S&P 500 information technology sector index (see chart below). IBM has also returned 4.6% of its recent share price in dividends over the past year, versus the index’s dividend yield of 0.7%. But over the past five years, the index has risen 96%, while IBM shares have fallen 11%.
While Big Blue’s revenue has stagnated for years, third-quarter revenue rose 15% on a constant-currency basis after factoring in IBM’s spin-off of its declining managed infrastructure services business, Kyndryl (KD) at the end of 2021. On the same constant currency basis, IBM projected annual revenue growth “above its mid-single digit model” along with $10 billion in all of 2022. free cash flow when it released its third quarter results.
Wall Street’s verdict on the split
The company’s 5% growth target in 2023 is at risk, as is the stock’s recent outperformance amid expected “early cycle momentum” in favor of faster-growing companies later this year, analysts at Morgan Stanley warned last week in downgrading IBM shares to equal weight from overweight.
In contrast, Bank of America reiterated its Buy rating on IBM the same day, citing a turnaround in growth, better cash generation, a defensive business position and an “attractive” dividend yield. “We expect IBM stock to outperform against a weaker macro backdrop with an improving fundamental story,” BofA analysts wrote.
Also last week, Evercore ISI added IBM to its “tactical outperform list” ahead of earnings, citing its recurring revenue and enterprise clientele as benefits during the downturn. While the strength of the dollar recently hurt revenue and profits, that strength has since reversed and should serve as a tailwind in the fourth quarter and 2023, according to analysts at Evercore.
IBM stock price vs. the S&P 500 IT sector index, last year
IBM key statistics
|Estimate for Q4 FY2022||4th quarter of fiscal year 2021||4th quarter of fiscal year 2020|
|Adjusted earnings per share ($)||3.59||3.35||1.88|
Source: Visible Alpha