Where Will IBM Go Next?

With shares of International Business Machines (NYSE:IBM) trading around $191, 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.

IBM CEO Ginni Rometty will face a skeptical audience when she speaks to Wall Street analysts on Wednesday. As she’s worked to revamp the company in a shifting technology industry, Rometty has kept herself bound to IBM’s target of at least $18 per share in adjusted earnings this year — a number that 60 percent of analysts anticipate the company will miss. After eight consecutive quarters of revenue declines, she must start increasing sales or reduce expenses further to avoid missing the profit goals. At a daylong conference in New York, Rometty, 56, will probably lay out her plan to use newer technology, such as data analytics and cloud computing, to mount a strong comeback in the coming quarters. The question is whether those lines of business can expand quickly enough to make up for falling sales in IBM’s hardware unit and in emerging markets like China.

T = Technicals on the Stock Chart Are Strong

IBM stock has struggled to make significant progress in the last several years. However, the stock is currently moving higher and looks set to continue. 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 above its rising key averages, which signals neutral to bullish price action in the near-term.

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

14.05%

6%

4%

What does this mean? This means that investors or traders are buying a small 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

Flat

Average

July Options

Flat

Average

As of Tuesday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish 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 mixed 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), and Microsoft (NASDAQ:MSFT) — and sector?

IBM

HP

Oracle

Microsoft

Sector

Year-to-Date Return

2.34%

18.23%

9.25%

7.75%

10.39%

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. Chief Executive Officer Ginni Rometty will face a skeptical audience when she speaks to Wall Street analysts on Wednesday. The stock has been struggling over the past couple of years but is currently moving higher. Over the last four quarters, earnings have been rising while revenues have been declining, which has produced mixed 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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