IBM’s Great Quarter and Upside Guidance

“We threw up a chart before of IBM. The earnings came in better than expected. IBM raised its forecast to $9.70. Thought it would raise its forecast for the year by just about a dime. So really, hitting the cover off the ball, knock the doors off, whatever metaphor you want to use, IBM did it… IBM is up 5% in the after-hours session. Tim calls it lackluster. Karen? >> I think it’s impressive. They didn’t need to raise guidance that much. They’ve got to feel very confident.” CNBC’s Fast Money 7/16/2009

Reporting earnings among other heavyweights after the market’s close on Thursday, there is no doubt that IBM (IBM) stole the show. They reported second quarter earnings of $2.32 per share versus consensus estimates of $2.02 and easily exceeding last years results of $1.97. This impressive earnings beat was accomplished with 13% less revenue than the period a year ago, which fell slightly below estimates coming in at $23.3 billion. Revenue was down across the board in each division within the company. Whatever disappointment the company encountered with slipping revenue, it totally made up for it with a huge lift to guidance for the second half of the year. IBM raised guidance to $9.70 from $9.20, which brings the forward looking P/E multiple a very reasonable 11.4x.

This adds to the momentum in tech that was started by Intel (INTC) earlier in the week. These two firms are certainly bellwethers for the sector and signal that the worst is possibly over for tech. While many firms are getting a boost from beating far lowered estimates, IBM is actually growing earnings and margins. If they can begin to see sales gains in the second half of the year, then further earnings strength will be all but assured. Our outlook on the stock was positive coming into the announcement and remains optimistic. Management has performed admirable dealing with slipping revenue and still producing profits that were 10% better than even the most bullish Wall Street analyst.

IBM’s stock has had an impressive start to 2009 gaining 31% year to date, but we think that the gains have been justified by the strong performance of the company. We are reaffirming our Undervalued stance on IBM after the earnings release. Surprisingly, the stock shot up 5% in after hours trading, but steadily fell back down and at this time are only 1.5% higher. We would have expected an announcement of this magnitude coupled with a upward revision to guidance would be met more enthusiastically by the market. Friday’s market action will be extremely interesting after the S&P 500 has already gained 7% on the week. Will IBM propel the market to further those gains, or will profit taking motivate a sell off?

Big Blue’s Great Quarter and Better Guidance

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