IBM reports earnings on Thursday.
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IBM’s earnings report, scheduled for Thursday, could be more consequential than normal. Investors will be listening for more details on the planned spinoff of the company’s $19 billion managed-infrastructure services business, which is expected to be completed by the end of the year.
IBM (ticker: IBM) didn’t provide guidance for the fourth quarter, citing the uncertainties connected with the continuing Covid-19 pandemic and the associated economic downturn. The Wall Street analyst consensus for the quarter calls for $20.6 billion in revenue, and non-GAAP earnings of $1.79 a share. That would be down from $21.8 billion and $4.71 a share a year ago.
The Street is projecting March quarter revenue of $17.6 billion, down a hair from a year ago, with non-GAAP profits of $1.65 a share, versus $1.84 a share a year ago.
Earlier this month, IBM picked Martin Schroeter, a nearly three-decade IBM veteran, to run the still-unnamed spinoff business. But it has yet to disclose many other details about the planned transaction.
Analysts are hoping IBM will resume providing financial guidance, after suspending the practice in April as the pandemic raged. Evercore ISI analyst Amit Daryanani writes in a research note that the “big focus” will be on the company’s 2021 outlook for both earnings per share and free cash flow, though he concedes that the pending spinoff could prevent IBM from providing explicit guidance. He expects IBM will generate $6 billion to $8 billion in free cash flow this year, down from $12 billion in calendar year 2019.
As for the December quarter, Daryanani says the consensus earnings forecast is achievable, but fears a potential revenue miss, and projects $20.3 billion for the top line. The analyst is concerned that the spinoff plan creates potential for management’s focus to be diverted from day-to-day operations, potentially affecting revenue.
UBS analyst David Vogt wrote in a research note this week that he expects a major restructuring at post-spinoff IBM, in which the company could cut its head count by as much as 15% to 20%, cutting billions in costs in the process. He also thinks IBM could be ahead of schedule on its spinoff plan.
Vogt sees fourth-quarter earnings of $1.62 a share, well short of the Street consensus. Vogt maintains his Neutral rating and $125 price target on the stock, noting that he has concerns about IBM’s long-term revenue growth, even after likely cost-cutting in a “challenging” economic environment.
Stifel analyst David Grossman, meanwhile, has a more optimistic view—he maintains his Buy rating and $147 target price heading into earnings. He views IBM as a “value stock with an attractive dividend yield,” about 5%. He says the stock could generate higher multiples on “better execution” and the planned spinoff. Grossman says his sum-of-the-parts calculation points to a share price in the $150 to $180 range over the next 12 months, with even “middle of the road” execution by IBM management.
“Key determinants of success” include indications that the legacy IBM software business returns to growth post-Covid, re-acceleration in the company’s global business services segment, and operational and financial improvements at the planned spinoff. he writes. For the fourth quarter, Grossman sees revenue of $20.9 billion and earnings of $1.67 a share.
Write to Eric J. Savitz at [email protected]
