On September 8th, we had recommended buying a one-touch put option in the IBM counter, with a strike price greater than $153. The target was hit multiple times in the past one month. On Tuesday, IBM (LON: IBM) reported its fiscal 2016 third-quarter results that topped the analysts’ estimates. Still, the share price buckled 3.7% under selling pressure. While the concerns of traders are genuine, we still believe that it is time to take a long position in the counter due to the reasons mentioned below.
The North Castle, New York-based company reported a marginal decline in the fiscal 2016 third-quarter revenue to $19.226 billion, from $19.280 billion in the similar quarter of 2015. The 3Q revenue was higher than the Zacks estimate of $19.01 billion.
During the third quarter, the enterprise technology company recorded GAAP earnings of $2.85 billion or $2.98 per share, down from $2.96 billion or $3.01 per share in the third quarter of 2015. Excluding charges, the third-quarter 2016 non-GAAP earnings were $3.15 billion, compared to $3.272 billion in the corresponding quarter of 2015. On a per-share basis, the Q3 2016 non-GAAP earnings per share of $3.29 exceeded the analysts’ estimates of $3.23 per share. However, it was below the Q3 2015 non-GAAP earnings per share of $3.34.
The gross profit margin has declined to 46.9%, from 48.9% a year ago. Martin Schroeter, the CFO of IBM clarified that the margins would be under pressure as the company is shifting from sales to subscription-based software and cloud services. Regarding the question on intellectual property income, Schroeter stated that it should not be construed as a one-time earnings boost by the analysts and that the company is hopeful of realizing profits in a similar manner over the next few years.
In fact, IBM has posted growth in its core business segments of Cognitive Solutions, and Technology Services & Cloud Platforms. The Cognitive Solutions segment reported a 4.5% y-o-y growth in revenue to $4.235 billion. A further breakdown indicates that the Cloud business grew 44% on a y-o-y basis. The Technology Services & Cloud platform segment revenue posted a 2.4% y-o-y increase in revenue to $8.748 billion. Overall, the ‘strategic imperatives’ (cloud, security, analytics, and mobility business) registered a growth of 16% on a y-o-y basis.
The CFO also opined that IBM is netting good returns for the investments made in the ‘strategic imperatives’. The company also reaffirmed its fiscal 2016 earnings guidance of $13.50 per share.
The historic price chart shows that the stock is near the proven support of 150. The stochastic oscillator is moving below the reading of 20 for the past one month. Thus, we can anticipate a trend reversal in the stock soon.
So, a binary trader can invest in a one-touch call option with a strike price of $158 or lower to benefit from the prediction made through the fundamental and technical study of the stock. The trader should also ensure that the call option remains valid for a minimum of one month from the date of making an investment in the trade.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
