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Is IBM Stock a ‘Buy’ before Its Q1 Earnings?

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IBM (NYSE:IBM) stock rose 3.8% on April 17 and closed at $120.12. The stock was trading 24.3% below its 52-week high of $158.75. At the same time, the stock was trading 32.6% above its 52-week low of $90.56. At the closing price on April 17, the stock had a market cap of $106.7 billion.

IBM stock has lost 13.7% in the last 12 months. Meanwhile, the S&P 500 Index has decreased by 1.1%. Oracle (NASDAQ:ORCL) and Microsoft (NASDAQ:MSFT) have gained 0.3% and 46.7%, respectively.

What can investors expect from IBM’s first-quarter financial results? The company will likely announce its first-quarter earnings results on Monday after the market bell.

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IBM’s Q1 results

Wall Street analysts expect IBM to report sales of $17.6 billion in the first quarter—a fall of 3.1% YoY (year-over-year) compared to $18.2 billion in the first quarter of 2019. Also, analysts expect the company’s adjusted earnings to decline by 20.0% YoY to $1.80 per share in the first quarter.

Analysts expect IBM’s revenues to fall by 4.2% in 2020 to $73.9 billion. The sales will likely rise by 3.5% in 2021 to $76.5 billion. The adjusted earnings will likely fall by around 8.4% in 2020 to $11.73 per share. However, the profits could rise by 10.6% to $12.97 per share in 2021.

Microsoft should report its financial results for the third quarter of fiscal 2020 on April 29. In the March ended quarter, analysts expect the company’s adjusted EPS to rise 13.2% YoY to $1.29. Microsoft’s revenues could rise by 11.2% YoY to $34.0 billion.

Analysts’ recommendations and target price for IBM stock

Among the 19 analysts covering IBM stock, five recommend a “buy,” 12 recommend a “hold,” and two recommend a “sell.” Currently, analysts have a 12-month target price of $131.24 on IBM stock. On April 17, the stock was trading at a discount of 9.3% to analysts’ 12-month target price. The median target price was $135.00 on the same date.

On April 17, BMO Capital analyst Keith Bachman slashed its target price on IBM stock to $135 from $155 but kept the “market perform” rating. The target price of $135 is at a 12.4% premium to IBM’s stock price as of April 17. The analyst reduced its 2020 EPS target from $13.33 to $11.69 and its 2021 target from $14.02 to $13.02. According to a report from TheFly, “The analyst is increasingly concerned about the macro backdrop, with the strength and timing of improved economic growth looking uncertain.” The report also said, “Even in the Cognitive sector, Bachman believes that while Red Hat will have more durability since about 90% of revenues are derived from subscriptions, upsells and new logo growth will suffer.”

Last week, Credit Suisse reduced its target price from $173 to $150, while Wells Fargo lowered its target price from $145 to $120.

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IBM stock’s valuation

Currently, IBM stock is trading at 10.24x its fiscal 2020 estimated non-GAAP EPS of $11.73. The stock is also trading at 9.26x its fiscal 2021 estimated non-GAAP EPS of $12.97. Analysts expect IBM’s earnings to rise at a CAGR of 3.3% over the next five years.

Technical analysis

Based on the closing price on April 17, IBM stock was trading 7.3% above its 20-day moving average of $111.90. The stock is also trading 3.8% below its 50-day moving average of $124.92 and 8.2% below its 100-day moving average of $130.80.

IBM’s 14-day RSI (relative strength index) score is 53. The score indicates that the stock isn’t overbought or oversold. IBM’s upper, middle, and lower Bollinger Band levels are $127.80, $111.90, and $95.99, respectively. On April 17, the stock closed near its upper Bollinger Band level, which indicates that it’s overbought.

In 2019, IBM’s free cash flow fell 0.1% YoY to $11.9 billion. The company’s operating cash flow also decreased by 3.1% YoY to $14.8 billion. IBM’s capital expenditures fell 36.2% YoY to $2.4 billion in 2019.

In 2019, IBM returned $5.7 billion to shareholders in the form of dividends. On April 17, the company’s dividend yield was 5.4%. Read Cloud Revenues Dominate IBM’s Q4 Earnings to learn more.

Stay tuned to learn how IBM performed in the first quarter.

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