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IBM Earnings Could Lag as Big Blue Goes for Big Change

July 20, 2015

International Business Machines (IBM), like other Dow Jones Industrials’ components, is in deep transition mode and investors well know its performance could lag the year-ago result.

Big Blue, which reports Q2 results and holds a conference call after Monday’s closing bell, is forecast to turn in earnings of $3.78 a share, minus items, on revenue of $20.94 billion, according to Thomson Reuters. That’s down a hefty 15% and 13%, respectively, from the same quarter a year earlier. The stock has been walloped this year, retreating nearly 12% from year-ago prices. But since June 30, without news to support it, the stock has advanced by nearly 6%.

Its earnings track record has been dismal in recent quarters. IBM has posted declining revenues in 13 consecutive quarters. This time around, software sales are projected to dive 9.4% to $5.88 billion. Even that’s a big if. Software sales were better than expected in Q1 but that was after four straight quarters of disappointing results. 

Growing Pains for This Old Blue Chip

IBM, once a business-focused hardware frontrunner, is “rebalancing” its workforce and banking on what it hopes will be the far more lucrative cloud computing services, data analytics, mobile applications for corporations, and security businesses. It has inked major partnerships with Apple (AAPL), Twitter (TWTR), Facebook (FB), and the Weather Channel. Investors will likely be looking for continued growth in those segments.

This has been a painful remaking for Big Blue, but as CEO Virginia Rometty told the Wall Street Journal earlier this year, “I can only change a company this size by making big bets.”

Like other multinationals, IBM is running into stiff headwinds on the foreign currency side, which Rometty calls unprecedented. In Q1, the strong dollar shaved eight percentage points, or $1.7 billion, from the top line.

In the last three quarters, the stock has traded lower the next day following a post-close earnings release.

Two-Sided Option Indicators

With technology companies, we often see some speculative option buying ahead of earnings. But interest in IBM is pretty well dispersed between calls and puts most likely because the company has missed revenue targets so frequently.

At quick glance, we see some buyers of the weekly 175 calls and 170 puts. The short-term option market is pricing in a 3.5% move in either direction for IBM shares after earnings, according to TD Ameritrade’s thinkorswim® platform.

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