Will Recent News Hurt IBM’s Stock?

With shares of International Business Machines (NYSE:IBM) trading around $184, is IBM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

IBM is an information technology company. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. Technology products and services are in high demand worldwide, as consumers want to be up to speed and companies always need the latest and greatest to stay ahead of the competition. Cloud computing has been hot in recent times, which has not been good news for IBM. Should the company want to hold on to its market share, it needs to make moves quickly and provide the technology products and services that worldwide consumers and companies demand.

The Chinese government is reviewing whether domestic banks’ reliance on high-end servers from IBM compromises the nation’s financial security, people familiar with the matter said, in an escalation of the dispute with the U.S. over spying claims. Government agencies, including the People’s Bank of China and the Ministry of Finance, are asking banks to remove the IBM servers and replace them with a local brand as part of a trial program, said the four people, who asked not to be identified because the review hasn’t been made public.  The review fits a broader pattern of retaliation after American prosecutors indicted five Chinese military officers for allegedly hacking into the computers of U.S. companies and stealing secrets. Last week, China’s government said it will vet technology companies operating in the country, while The Financial Times reported May 25 that China ordered state-owned companies to cut ties with U.S. consulting firms.

Harriet Ip, a Singapore-based spokesperson for IBM, referred questions to IBM in the U.S. Sean Tetpon, a U.S.-based spokesperson for IBM, didn’t immediately respond to a phone call or e-mail requesting comment. “Security trumps everything,” said Duncan Clark, chairman of BDA China Ltd., a Beijing-based consultant to technology companies. “China doesn’t need the U.S. companies in the way it did for the last few decades.”

T = Technicals on the Stock Chart Are Weak

IBM stock has struggled to make significant progress in the last several years. The stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, IBM is trading between its rising key averages which signal neutral price action in the near-term.

IBM

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of IBM options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

IBM options

15.19%

36%

34%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Average

Average

July Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on IBM’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for IBM look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-15.19%

11.63%

10.51%

11.4%

Revenue Growth (Y-O-Y)

-3.97%

-5.46%

-4.15%

-3.33%

Earnings Reaction

-3.25%

-3.27%

-6.37%

1.76%

IBM has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about IBM’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has IBM stock done relative to its peers, HP (NYSE:HPQ), Oracle (NYSE:ORCL), Microsoft (NASDAQ:MSFT), and sector?

IBM

HP

Oracle

Microsoft

Sector

Year-to-Date Return

-1.79%

18.01%

9.78%

6.90%

9.22%

IBM has been a poor relative performer, year-to-date.

Conclusion

IBM is a global technology company that provides essential products and services to companies and consumers worldwide. The Chinese government is reviewing whether domestic banks’ reliance on high-end servers from IBM compromises the nation’s financial security. The stock has been struggling over the past couple of years and is currently pulling back. Over the last four quarters, earnings have been rising while revenues have been declining, which has produced conflicting feelings among investors. Relative to its peers and sector, IBM has been a poor year-to-date performer. WAIT AND SEE what IBM does next.

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