* Reports Q1 2019 results on Tuesday, April 16, after market closure
* Revenue Expectation: $ 18.52 billion
* EPS Expected: $ 2.22
A lot is at stake for International Business Machines (NYSE 🙂 when the company reports it tomorrow. First, it must prove that investor optimism about its generation is justified and that it is well on its way to consistently exceeding expectations.
If Big Blue successfully demonstrates that the turnaround is accelerating, this year's powerful rally – which placed the company's shares among the best performing blue chip stocks on the – is likely to continue.
The shares of this legacy technology giant, which dominated the first decades of computers with inventions such as the mainframe and later the floppy disk, ended the Friday session at $ 144.35, an increase of more than 25% this year. They have won 34% since the low point in December and performed better than both the (+ 20.3%) and the technically heavy (+ 26.2%).
IBM weekly chart
IBM bulls focused on the company's strong results in the fourth quarter of 2018 and the optimistic forecast for the current year. After beating analysts 'estimated earnings in the fourth quarter, IBM said in January that it expects adjusted earnings per share of at least $ 13.90 in 2019, ahead of analysts' forecasts of $ 13.89. This was the second quarter in a row in which IBM showed growth, after six years of revenue decline.
Game-Changing Acquisition
With the recent rebound in shares, investors may be concerned that this rally has gone ahead and the stock is therefore risky. In the short term, that fear may be true, but we are more convinced that the company is on the right track to realize its long-term plan for the turnaround.
The pivot in IBM's growth strategy was to counteract a slowdown in sales by conquering a larger share of the new growth areas of the digital economy. That goal remained a distant dream until last year, because the company's attempts to grow organically were unable to produce results and satisfy investors.
But that will not be the case in the future. In our opinion, the $ 33 billion purchase of Red Hat (NYSE 🙂 last year will prove to be a game changer. This acquisition adds a relatively high margin software company to IBM & # 39; s stable offering, especially in the hybrid cloud services it offers to business customers.
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 Web Services (NASDAQ 🙂 in addition to their own private cloud networks, according to a Jefferies & Co. forecast.
For long-term investors pursuing a steady income stream, ownership of IBM shares makes much sense. The company plans to return to shareholders approximately 70% to 80% of the free cash flow each year, with annual dividend increases and ongoing share buy-backs.
Bottom Line
IBM shares remain an attractive turnaround bet suitable for long-term investors with a time horizon of 5-10 years. Despite the recent rally, his share still yields 4.4%, double the average of S & P 500 with 2%. The company has increased its dividend five times in the last five years. We believe that the upside potential remains strong if the company again delivers a positive surprise in its Q1 results.
For those with the patience to hold on to this investment, IBM shares may prove to be of good value, especially given the takeover of Red Hat by the company, in addition to the old activities that offer recurring cash flows.
