International Business Machines Corp. – or IBM – released its 3rd quarter earnings report earlier this week. And shocked the world by giving its best performance in nearly 9 years. The company, previously known as Big Blue, shot up by $12.99, which is 8.9% on Wednesday to close the day’s trading at $160.46. At one point in intraday trading, the tech giant IBM stocks went up by $14.69 or 10.00%. Thanks to IBM’s performance, the Dow went up by 89 basis points to reach another record closing.
Quarter Earnings of IBM
IBM has been beating targets for the last 12 straight quarters, so this quarter’s earnings also beating targets did not come as much of a surprise to anyone. However, the stocks of a company gaining so much after the release of earnings results is much less common.
This is the first time since 2009 that IBM has shown a post-earnings gain of such magnitude. That time, the company’s stocks shot up by 11.5% after the fourth quarter (for 2008) earnings report was released. Since then, the gains post earnings reports have ranged from as little as 0.1% to 5.7%.
As per data provided by FactSet, this gain is the 9th largest this millennium and the 18th largest in the entire history of the stock. Also, the stock price jump was the second largest in the company’s history; the biggest gain IBM recorded was way back in 2000, when the company’s stocks soared to $13.50 on July 20.
Since Ginni Rometty took the mantel of CEO and Chairman of IBM, the company’s stocks have declined 13%, while the Dow’s stocks have skyrocketed by 89%. This is the biggest gain the company has seen since she took over on Jan 1, 2012.
Katy Huberty Analysis
According to Katy Huberty, analyst at Morgan Stanley, this quarter’s earnings actually marks a turning point for IBM. This is proof that the gross margin trend for the company is finally rising.
Despite the surge in stock prices, the company’s stocks are still down 3.9% year-to-date whereas the technology sector, the SPDR has gained 26% and the Dow Jones has gone up by 17% so far.
Morgan Stanley has reiterated its rating of “overweight” and give the company a stock price target of $192. However, the overall consensus rating is “hold” with a consensus price target of $161.
However, according to Therese Poletti, a senior columnist at MarketWatch, the company has only done well due to aggressive tax practices.
{More information about stocks: European Stocks Doing Well}
The company’s third quarter net income was $2.73 billion which was an EPS of $2.92 per share, down from $3.2 billion or an EPS of $2.98 per share from Q3 2016. Revenue also fell marginally from $19.23 billion to $19.15 billion for the same time in 2016. The consensus targets for IBM were $2.84 earnings per share with a revenue of $18.61 billion.
Despite these negative figures, the company has come out a winner. And this is, according to Poletti, due to the company’s ability to keep its taxes low. In fact, recent data reveals that IBM has the second-lowest median effective tax rate of 10% in the entire Dow Jones 30 list.
Corporations use many techniques to keep their tax rates really low, like using legal loopholes, retaining loss-making divisions, re-structuring, write-downs and as well as not bringing foreign earnings back into the country. In fact, thanks to such practices, IBM has been able to decrease its tax rates by 23.1%.
According to Kulbinder Garcha, erstwhile analyst at Credit Suisse, IBM’s management of its taxes has been the main reason why the company has been able to show gains despite continuous profit declines since 2014.
Leave a Reply