Do estimates fully reflect dollar strength?
Disappointment may not be the last.
There are only a handful of major technology companies reporting during this holiday-shortened week. Perhaps the most interesting of them will be IBM (NYSE: IBM ), which is scheduled to report Thursday afternoon. While the stock is up roughly $10 since its last earnings report, the US dollar has also seen a nice rise. It wouldn't surprise me if IBM's report disappoints this week, which may be a canary in the coal mine for all global large cap tech names.
According to the company's 10-Q filing , more than 52% of its third-quarter revenues came from outside the Americas, and of course not all of that Americas revenue came from the US. Since the company last reported on October 17th, the Dollar Currency Index has been strong, primarily thanks to Trump's election victory, seen below.
(Source: cnbc.com)
On the Q3 conference call , management basically said "we'll see where things go in the next few months" when referring to currency movements. While things at that point looked fairly neutral for the rest of 2016 and into this year, here is a list of some major currencies and their movements from Q3 earnings to end of 2016:
Euro down about 4%.
Yen down more than 12%.
Australia down more than 5%.
Mexico down about 10%.
Nordics mostly average down around 4%.
While we still have a few days left until earnings, we have not really seen a large move in analyst estimates . Since the Q3 report, the current period's street average has only declined from $21.77 billion to $21.69 billion. The final quarter of the year generates the most revenues for IBM, leaving the business more susceptible to foreign exchange impact on revenue.
When we get to the bottom line, there will be two items that will be significant: cost controls and share buybacks. If revenues are squeezed, was management able to cut expenses in step? In Q3, the buyback helped improve the year-over-year diluted share count by 2.17%. With analysts looking for a nickel per share improvement to $4.89, that likely would mean a decline in net income over the prior-year period, with the buyback making up a bit.
The stronger dollar is perhaps my biggest worry this earnings season and IBM will give us a snapshot on Thursday as to how big the impact was. Given the large weakness in some key currencies late in 2016, it would not surprise me to see a fairly disappointing report. That being said, investors will need to parlay these results towards expectations for Apple (NASDAQ: AAPL ) and others that derive a large share of revenues from outside the US.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Tagged: Technology , Diversified Computer Systems, Earnings