With shares of International Business Machines (NYSE:IBM) trading around $194 after IBM’s earnings, is the stock 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
International Business Machines (NYSE:IBM) is an information technology company that operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. Global Technology Services provides information technology infrastructure services and business process services. Global Business Services provides professional services and application management services. Software consists of middleware and operating systems software. Systems and Technology provides clients with business solutions requiring advanced computing power and storage capabilities. Global Financing invests in financing assets, leverages with debt and manages the associated risks. Through its segments, IBM is able to provide information technology products and services to a wide variety of companies participating in diversified sectors, worldwide.
For the most part, information technology is an industry with strong growth trends. However, IBM is having some challenges in the hot cloud computing sector.
T = Technicals on the Stock Chart are Weak
IBM stock has seen a consistent uptrend since establishing lows during the Financial Crisis. The stock has been range-bound for most of the last year and is currently trading at the low end of its range. 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 below its key averages which signal neutral to bearish price action in the near-term.
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 | 16% | 0% | 0% |
What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.
| Put IV Skew | Call IV Skew | |
| May Options | Steep | Average |
| June Options | Steep | Average |
As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts and are leaning neutral to bearish over the next two months.
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 Q1 | 2012 Q4 | 2012 Q3 | 2012 Q2 | |
| Earnings Growth (Y-O-Y) | 3.45% | 11.15% | 4.39% | 11.33% |
| Revenue Growth (Y-O-Y) | -5.11% | -0.64% | -5.39% | -3.34% |
| Earnings Reaction | -8.27% | 4.4% | -4.91% | 3.76% |
IBM has seen increasing earnings but declining revenue figures over the last four quarters. From these figures, the markets have had mixed feelings about IBM’s recent earnings announcements.
P = Poor Relative Performance Versus Peers and Sector
How has IBM stock done relative to its peers, Accenture (NYSE:ACN), Hewlett-Packard (NYSE:HPQ), Microsoft (NYSE:MSFT), and sector?
| IBM | Accenture | Hewlett-Packard | Microsoft | Sector | |
| Year-to-Date Return | 1.32% | 18.83% | 39.26% | 22.17% | 4.58% |
IBM has been a relative underperformer, year-to-date.
Conclusion
IBM provides key information technology products to companies participating in a multitude of industries around the world. The stock has done well in recent years and is now consolidating in a range extending back a year. A recent disappointing earnings release sent the stock to the bottom end of its recent range. Earnings, revenue figures, and institutional shareholders have sent mixed signals to investors. Relative to its peers and sector, IBM has underperformed year-to-date. WAIT AND SEE what IBM does this quarter.
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