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Earnings: How Are IBM and GE Adapting to a New Era?

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January 19, 2017
Earnings for IBM, General Electric 2017 Outlook
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Two big industrial companies, both of which are transitioning to the digital, cloud-based era, will take the stage to tell their earnings stories. International Business Machines (IBM) is set to report Thursday after the bell, and General Electric (GE) follows on Friday morning.

IBM and Watson

It’s been about five years since IBM began its transformation from Big Blue, the computer hardware behemoth, into a cognitive solution and cloud-based technology company that also generates revenues from its mobility, analytics and security businesses.

On the marquee is Watson, an artificial intelligence (AI) platform whose software processes big data and, as Chief Executive Ginni Rometty said on CNBC this week from Davos, Switzerland, forges a “partnership between man and machine.”

That and its so-called “strategic imperatives” have helped IBM outpace Wall Street’s top- and bottom-line forecasts this fiscal year. But its earnings per-share growth has been sloping downward for seven straight quarters on a year-over-year basis. Some analysts expect that trend to end with Q4’s results, but they may also be looking for more information on the outlook for these strategic imperatives, as well as the overall revenue and profit trajectory for 2017 and beyond.

The conference call may be an interesting one, according to some analysts. All week, Rometty has been in Davos beating the drum about IBM’s transformation and Watson’s AI abilities, something that some analysts have noted may be a job killer in some industries. “The fears are not positioned properly and in many cases are unfounded,” she said on CNBC, referring to the man-machine partnership.

Rometty conceded that jobs are likely to be lost as AI software such as Watson continues to rapidly dissect data and plough through research—tasks that many gainfully-employed people currently perform. But, she said, that will free up time for workers “to do what humans do best,” adding that it is all about “augmenting” the workflow. No more blue-collar or white-collar jobs, she said; they’ll all be “no collar.”

Some analysts say they want to hear her talk more about that and offer more insight into how IBM is going to ring up consistently better top line sales and profits.

At Thomson Reuters, analysts who weighed in are estimating per-share profit of $4.89 on revenues of $21.66 billion. A year ago, IBM posted earnings of $4.84 a share on top-line sales of $22.1 billion.

Short-term options traders have priced in a potential share price move of 3.5% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform from TD Ameritrade.

Call buyers are seen at the weekly 170 strike, and put activity has concentrated on the 160 and 165 strikes. The implied volatility is near the middle of its 52-week range at the 53rd percentile. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

IBM, 3m, 2016-17

FIGURE 1: STEADY AS SHE GOES.

IBM shares have ridden a steady road higher this year, gaining traction after the November election. Year-on-year, shares are up some 30%; 7.5% of that came in the post-election rally that seems to have waned in recent sessions. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

The New GE: Post-GE Capital

GE, which now touts itself as a “digital industrial company,” will open the books to a quarter that it said in October would be ending “free of GE Capital,” the financing arm it has been divesting in recent quarters. As a result, the blue chip is expected to post its first quarterly decline in a year. Results are slated to come out ahead of the bell Friday.

In Q3, profits were generated by strong performance in power, renewable energy, aviation and healthcare, according to the company’s release. Some analysts say they expect power and renewable energy to have led the way in Q4. On the conference call, some say they will be listening for insight into orders for equipment and services, which some see as improving this year. Some industry analysts expect revenue gains in the mid-single digits this year in many sectors of the S&P 500—and GE has its tentacles in a number of them.

On Wednesday, for example, GE announced that it was awarded more than $1.4 billion in power-generation orders from Iraq's Ministry of Electricity, to set up power plants, and to deliver technology upgrades and maintenance services.

In Q3, GE reported that orders totaled $26.9 billion, up 16% from the year-ago period.

For Q4, analysts reporting to Thomson Reuters are projecting, on average, earnings of $0.46 per share, off 13% from last year’s $0.52 a share. The estimate excludes nonrecurring items. Revenue, however, is expected to come in at $33.94 billion, just above the $33.8 billion a year ago, according to consensus estimates from FactSet.

Short-term options traders have priced in a potential share price move of under 2% in either direction around the earnings release, according to the Market Maker Move™ indicator.

Call activity has been noted at the weekly 31 and 32 strikes, with put activity at the 31 strike. The implied volatility resides down at the 10th percentile. (Please remember past performance is no guarantee of future results.)

GE, 3m, 2016-17

FIGURE 2: LATE-YEAR GAINS.

GE shares traded in a choppy manner throughout most of the year, but jumped on the post-election bandwagon in November. Since then, shares are up better than 6%, but have lost some luster in recent sessions. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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