Will IBM Head Higher After Recent Headlines?

With shares of International Business Machines (NYSE:IBM) trading around $189, 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 announced a $1.2 billion commitment on Friday to build 15 data centers in key financial and geographic hubs as it initiates its first major cloud expansion since acquiring SoftLayer in June for $2 billion. The cloud expansion will cover 15 countries in five continents (all but Africa and Antarctica), including new data centers in China, Hong Kong, London, Japan, India, Washington D.C., Canada, Mexico City, and Dallas, as well as a number of local “cloud hubs.”

That will bring IBM’s total global toll to 40 data centers, including 13 pre-existing ones from cloud provider SoftLayer and 12 from IBM, with plans to expand into the Middle East and Africa in 2015. ”IBM is continuing to invest in high growth areas,” said Erich Clementi, senior vice president of IBM Global Technology Services. The expansion, which adds to the $7 billion IBM has spent since 2007 building its cloud portfolio through acquisitions, data centers, and patents, will provide enterprise clients improved flexibility, transparency, and control over how they manage data, run their business and deploy IT.

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 trending 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 between its rising key averages, which signals 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

23.53%

93%

90%

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

Put IV Skew

Call IV Skew

February Options

Average

Average

March Options

Average

Average

As of Friday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

10.51%

11.4%

3.45%

11.15%

Revenue Growth (Y-O-Y)

-4.15%

-3.33%

-5.11%

-0.64%

Earnings Reaction

-6.37%

1.76%

-8.27%

4.4%

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

P = Excellent 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

1.6%

6.86%

-0.03%

-2.69%

2.43%

IBM has been a relative performance leader, year to date.

Conclusion

IBM is a global technology company that provides essential products and services to companies and consumers worldwide. The company announced a $1.2 billion commitment on Friday to build 15 data centers in key financial and geographic hubs. The stock has been struggling over the last couple of years but is currently surging higher. Over the last four quarters, earnings have been rising while revenues have been declining, which has left investors optimistic about IBM’s earnings announcements. Relative to its peers and sector, IBM has been a relative year-to-date performance leader. Look for IBM to OUTPERFORM.

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