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Will Big Blue Bleed Red on Earnings or IBM @ $280 by 2015? 10.16.2012

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The next catalyst is their earnings announcement today!

For a complete review of what the options market, charts, statistics, and history are implying for IBM today see the link below for it is very important to know every angle.

LINK HERE

http://www.keeneonthemarket.com/blog/1551-pregame-ibm-earnings-from-every-angle-ibm-qqq-10152012

The analyst community has an average price target of $219 on IBM and many analysts are expecting about $3.61 in EPS. Credit Suisse, who has a neutral on the stock, recently adjusted their Q3 2012 EPS to $3.69, they go on to note that IBM will face tough times bringing revenue back up to par, but also noted their migration to higher margin businesses that compensate for said headwinds. Credit Suisse later went on to state that IBM is actually more or less a defensive type of stock, for it will get 50% of their incremental EPS from M&A and buybacks over the next five years. While this is not the most shareholder friendly or organic way to grow it still boosts the bottom line and hopefully shareholder value.

IBM will benefit from the mainframe refresh cycle for they have been expanding their mainframe ecosystem as they have been growing inorganically, for example in the software services and cloud space. This cycle is where IBM is sensitive to macro events and trends. The mainframe cycle is expected to be weak and damper the announcement today. Credit Suisse expects systems & technology revenues to be $3.98bn (-11% YoY) in the quarter; which may be confirming IBM’s recent focus shift into other businesses. Meanwhile, software is going to be increasingly important for IBM. Their $3.5bn in acquisitions need to prove their value and boost growth. Analysts are expecting software revenues to be up mid single digits YoY.

The analyst community has 13 overweighs, 19 holds, and zero sells currently. The median PE for next year is 12.3, below the market, but next year IBM has about $16 in forecasted EPS, implying about a $192 price, below where we are now.

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mark@keeneonthemarket.com

Screen shot 2012-10-14 at 1.12.39 AM

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Pregame IBM Earnings From Every Angle (IBM, QQQ) 10.15.2012

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Screen shot 2012-10-14 at 3.14.24 AM

Now to what is implied for the coming event, because the IBM October options only have this week to trade, they will be an organic way to derive what is implied for the event on the 16th after the close.  Using an implied volatility & time based model, we calculated the one-sigma move (68% probability within) to be roughly $8.74 up or down and the two sigma move (95% probability within) about $17.47 either way. On Friday, October 12th 2012, the stock had a 1% pop while the market was slightly down. The implied volatility curve (IV being a measure of risk, supply and demand, relative price, and an input into theoretical models) is displayed below, for it is important to know, especially if one is trading two different months in a spread.

The following chart includes the one and two sigma rolling probability cone and a volume profile.  The upward channel from mid July to now has been solid support and resistance. Additionally, we are currently sitting at the point of control on the upper distribution.  Massive support will sit, specifically on this expiration Friday (red vertical line), at $202.25.  The 150 day moving average will sit around there along with the volume profile’s value area high, and this level is at the lower end of the one sigma move (68% probability within). 

Screen shot 2012-10-14 at 12.57.39 PM

The ATM (at the money) front month $210 straddle (lifting the offer) is at about $7.36. Using a theoretical model, and adjusting time and implied volatility, in order to break even IBM must move up $9.34 (4.5%) or down $4.32(-2%) the next morning to offset the IV crush and time decay. We estimated front month IV to be 28.4%, for that was the average IV post earnings over the last six observations. It is interesting to note that as of the close on Friday, 10/13/12, front month IV was relatively cheap historically speaking, see excel sheet for data…average of 51.37% pre earnings IV while the current IV is at 38%.

Screen shot 2012-10-14 at 4.28.02 PM

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to:

mark@keeneonthemarket.com

Data courtesy of Thinkorswim