IT bellwether International Business Machines Corp. (IBM) is set to release its fourth-quarter of 2009 earnings on Jan. 19. We do not expect the earnings to be a major catalyst for the stock price movement, but our focus will be on its guidance for fiscal 2010, which could drive the stock price.

Historically, the company’s earnings have consistently surpassed the Zacks Consensus Estimate, and IBM has raised its guidance for almost every quarter in the last two years. During the third quarter, IBM raised its earnings outlook for fiscal 2009, the second time in the past year, and expects full-year earnings of at least $9.85 per share, up from the previous forecast of $9.70. The Zacks Consensus Estimate calls for earnings of $9.88 per share for fiscal 2009.

IBM is not expected to produce any earnings surprise in the coming quarters. For the upcoming quarter, the Zacks Consensus Estimate is $3.47 per share. Consequently, price movement is likely to be limited in the near-term.

IBM also expects to return to revenue growth in the fourth quarter. The company also expects 2009 pre-tax income for its software and services businesses to grow at double-digit rates, to around $8 billion.

While we believe that IBM is a fundamentally sound company with a strong market position, we anticipate some near-term hurdles. We believe that the overall demand environment could limit the stock’s relative appreciation in the near term. However, we also expect the company to benefit from the revival in IT spending.

We remain optimistic on the company’s long-term growth, and expect it to post stronger results in 2010 due to cost cutting and a shift to higher margin software and services business. Management stated that IBM is well on course to deliver an EPS of $10 to $11 in 2010. We expect further upside in IBM’s share price and advise stockholders to wait for a favorable exit point.

IBM faces competition from some of its top competitors, such as Hewlett-Packard Co. (HPQ), Cisco Systems Inc. (CSCO) and Dell Inc. (DELL).
 
While IBM stands to benefit from its strong liquidity position, operational efficiency, substantial free cash flow and earnings momentum, low growth in some of its segments and rising pressure in its Services business could impede IBM’s growth overall. We maintain our Neutral recommendation on IBM with a $134 price target. Currently, the stock maintains its Zacks #3 Rank, which translates to a short-term Neutral rating.
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