* Reports Q3 2019 results on Wednesday, October 16, after market closure
* Income expectation: $ 18.23 billion
* EPS expectation: $ 2.67
When International Business Machines (NYSE 🙂 CEO Ginni Rometty speaks, she has a fascinating story to tell about the turnaround that her age-old company is trying to bring together.
She gambles on hybrid cloud technology to reverse the dragging drop in sales after her $ 34 billion acquisition of Red Hat last year. She says the deal will add a relatively high-margin software company to IBM's offering at a time when the company's major customers are shunning their hardware and storing their data on competitors' cloud services, including Microsoft Corporation (NASDAQ 🙂 and Amazon .com Inc (NASDAQ :).
"This company had to be reinvented many times," Rometty said in an interview on Bloomberg Television last month. "It is something that many other companies are still dealing with. It is one thing to bring out new products, but it is different when the competitive landscape attacks your core business models and you have to develop a new one."
Work in progress
But if you dig a little deeper, that turn around is still a work-in-progress. In the period that ended on June 30, IBM's sales fell for the fourth consecutive quarter. Sales in the company's IT division fell by 6.7% year-on-year in the second quarter, while sales from the IBM mainframe business unit fell by nearly 20%.
When the company reports its third quarter tomorrow, Rometty must prove that investor optimism about its recovery is justified and that it is well on track to consistently exceed expectations.
If Big Blue succeeds in demonstrating that its turnaround is gaining in strength, this year's powerful rally – making the company's stock among the best performing blue chip stocks on the market – is likely to increase.
Shares of this legacy tech giant, who dominated the first decades of the computer with inventions such as the mainframe and later the floppy disk, traded at $ 142.04 at the end of Monday – up to around 25% this year.
With this increase in share, investors would like to see Red Hat improve the company's sales and results considerably. Approximately 85% of all companies are expected to use a hybrid cloud approach, with most using a combination of public cloud services such as Amazon (NASDAQ 🙂 Web Services alongside their own private cloud networks, according to a Jefferies & Co. forecast.
Bottom Line
In the short to medium term, IBM will continue to be affected by the structural headwind that damages sales and profitability. But for long-term investors, whose goal is a steady income stream, owning IBM shares makes perfect sense.
Despite the recent rally, his stock still yields 4.6% – more than double the average of 1.85% – with an annual payout of $ 6.48. The company has increased the dividend five times in the last five years. We believe that the upside potential remains strong if the company can demonstrate that the Red Hat acquisition is beginning to bear fruit.
