IBM $230 Fair Value: What We’re Watching In Earnings

IBM: International Business Machines logo
International Business Machines

International Business Machines (NYSE:IBM) is set to announce its Q3 earnings on October 16th. We expect the company to show revenue growth on y-o-y as well as q-o-q basis as the first half of the year is a cyclical low for the company. Last quarter, it reported revenues of $25.8 billion which is about 3% lower y-o-y but free cash flows were up 9% y-o-y at $3.7 billion and net income was up 6% y-o-y at $3.9 billion. Its Smarter Planet, Cloud Business and Business Analytics outperformed, with Smarter Planet revenue up 20% q-o-q, Cloud revenue nearly double and Business Analytics up by 13% q-o-q. Software and services did better than hardware which is on the decline. The Europe, Middle East and Africa division revenues was down 9 percent y-o-y at $7.9 billion. [1]

We expect Big Data analytics and cloud computing services will continue to drive revenue growth this quarter. IBM’s Sequoia, the world’s fastest supercomputer, is also expected to help the company sell its Big Data solutions. The expertise acquired by IBM in implementing low power data centers with high computing capabilities based on Project Blue Gene is likely to drive its cloud and analytics businesses.

See our full analysis on IBM

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What To Expect In 2012 and Beyond

Despite a slow quarter in terms of revenues, IBM has shown a significant increase in free cash flows that we expect it will invest back into highly profitable, high margin businesses such as Big Data Analytics and Cloud Services. It has raised its 2012 expectations by increasing EPS to at least $15.10 which is 10 cents more than the previous guidance of $15.

Focus On Cloud and Analytics To Help Revenues

The company’s focus on cloud computing and analytics is already paying off as these divisions have witnessed the highest revenue growth in Q2. IBM has also teamed up with AT&T to offer an integrated, end-to-end solution that provides access to cloud computing infrastructure over a secure private line provided by AT&T. This service simplifies access to the cloud and will provide IBM’s back-end services over a secure telecom connection provided by AT&T.

IBM Expanding Global Footprint

Despite companies in Europe reducing IT spending due to the Eurozone uncertainty, some Central and Eastern European economies are doing well. To tap these markets, IBM has opened two new branches in Poland and two in Turkey to tap the fast growing IT markets in these countries. The total IT market for 2012 is an estimated $9.8 billion in Poland and $9 billion in Turkey.  The new offices will focus on catering to customers and partners in the small and medium-sized business sectors.

FIFA World Cup 2014 And The Summer Olympics 2016

IBM also recently announced the opening of three new branches in Brazil, located in the cities of Joinville, Natal and Sao Luis. As Brazil gets ready to host the FIFA World Cup and the summer Olympics, IT spending by the Brazilian government is expected to increase significantly as it overhauls its existing telecommunications and IT infrastructure through programs such as the National Broadband Plan. Brazil is already one of the biggest contributors to IBM’s revenue and is a major growth economy. Growth markets are expected to account for nearly 30% total revenue by 2015, up from 21% in 2010. Brazil contributed approximately 19% of IBM’s revenue in 2011.m [2]

We currently have a $229 Trefis price estimate for IBM which is about 20% higher than the current market price.

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  1. IBM SEC Filings,, July 18, 2012 []
  2. IBMs Brazil Expansion Continues,, Oct 11, 2012 []