CHICAGO, Oct. 17, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: IBM Corp. (NYSE: IBM), Citigroup Inc. (NYSE: C), Goldman Sachs Group Inc. (NYSE: GS), US Bancorp (NYSE: USB) and Morgan Stanley (NYSE: MS).
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Here are highlights from Friday's Analyst Blog:
Earnings Preview: IBM
IBM Corp. (NYSE: IBM) is scheduled to announce its third quarter 2011 results after the closing bell on October 17, 2011, Monday. We noticed the quarter's estimates treading in a positive direction, and considering the past trends, we continue to believe another earnings beat is on the cards.
Current Quarter Expectations
For the current quarter, the Zacks Consensus Estimate for IBM's earnings is pegged at $3.22, a 4.21% upside from the previous quarter. Total revenue as per the Zacks Consensus Estimate is $26.24 billion, down 1.6% from revenues earned in the prior quarter.
We note that IBM has consistently exceeded estimates in the four preceding quarters. The average surprise during this time was a positive 2.13% and another positive earnings surprise is expected from the company.
Based on the strong first half of 2011, IBM raised its fiscal 2011 operating EPS estimate to at least $13.25 from its previous guidance of at least $13.15. GAAP EPS guidance was also raised to $12.87 from the earlier projection of at least $12.73 for the same period.
Currently, the Zacks Consensus Estimate for fiscal 2011 is pegged at $13.31 per share.
Estimate Revision Trends
In the last thirty days, four out of the 16 analysts covering the stock raised estimates for the current quarter, while none moved in the opposite direction, leaving the Zacks Consensus Estimate at $3.02 per share.
For fiscal 2011, one upward revision was noticed from the 18 analysts covering the stock. The Zacks Consensus Estimate for fiscal 2011 is pegged at $13.31 per share.
Analysts covering the stock are positive on IBM's strength in its services division, enterprise spending, share repurchase activity, and product refresh cycle. Moreover, the company's expansions in its cloud and analytics portfolio through strategic acquisitions and product innovations will contribute to its top-line and bottom-line.
Conclusion
We believe IBM's growing initiatives in the smarter planet, business analytics and optimization space will drive long-term growth. Besides, the ability to generate strong free cash flow, expand margins and improve the already robust balance sheet make the stock attractive over the long term.
IBM remains a heavyweight in the cloud computing market and its strong cash balance enables IBM to acquire companies with high intellectual property (IP), which will drive further growth in the upcoming quarters. We have a long-term Neutral recommendation on IBM and are optimistic about its strong fundamentals and robust growth prospects going forward.
The cloud computing market is expected to grow at a CAGR of 40.0% from 2010 to 2015, crossing $7.0 billion in revenues by 2015. Cloud computing leads to improved services and elevated security requirements for companies that use it and IBM's product portfolio is well positioned to benefit. Additionally, by 2015, IBM expects the Smarter Planet initiative to generate revenues of $10 billion.
IBM is experiencing strong revenue growth across all geographical regions, coupled with robust growth in emerging markets worldwide. IBM expects these growing markets to drive revenues and increase growth in 2011 and beyond.
We currently have a Zacks #3 Rank for IBM, which translates into a short-term Hold rating.
Earnings Preview: Citigroup
Citigroup Inc. (NYSE: C) is scheduled to report its third-quarter 2011 results before the market opens on Monday, October 17. The Zacks Consensus Estimate for the quarter is 81 cents per share, representing an increase of about 1.79% over the year-ago quarter.
Though Citi's restructuring efforts are appreciable, the trading revenues of the company seem to be the current concern. The volatility and market declines are expected to have a dampening impact on Citi's trading revenues.
There also remain concerns related to the impact of the financial reform law. Investors would also be eager to know the loan loss provisions at Citi as it is one of the world's largest banks, whose results give an insight into the broader economy.
Although the top-line headwind at Citi continued in the last quarter with revenue dropping from the prior-year period, the figure managed to exceed the Zacks Consensus Estimate. Shrinking revenue base and regulatory issues still remain an overhang.
The tardy economic recovery and escalating expenses are somewhat limiting Citi's earnings growth. However, in the long term, we believe investments in core franchise will help garner a solid market share and support its earnings.
Previous Quarter Performance
Citi's second-quarter 2011 earnings came in at $1.09 per share, outpacing the Zacks Consensus Estimate of 96 cents. The result also improved from the prior quarter's earnings of 99 cents per share and the year-ago quarter's earnings of 90 cents per share.
The better-than-expected results were driven by a drop in provisions for credit losses. The top-line headwinds at Citi continued with the revenue dropping from the prior-year period.
Citi reported net income of $3.3 billion compared with $3.0 billion in the prior quarter and $2.7 billion in the prior-year quarter.
Earnings Estimate Revisions – Overview
Prior to the results release, earnings estimate decreased from 85 cents to 81 cents per share over the last 7 days. The decline in estimates indicates weakness in the stock.
We will now look into the details of earnings estimate revisions to substantiate why investors should not be interested in this stock.
Agreement of Estimate Revisions
Looking at the estimate revision trends, it is quite clear that analysts are in agreement with the bearish third-quarter earnings outlook of Citi. Of the 21 analysts covering the stock, 8 have edged down their estimates for the third quarter over the last 7 days.
Moreover, for FY11 and FY12, eight and seven of the total analysts, respectively, have decreased their estimates over the last 7 days.
Clearly, the concern related to the company's trading business has played a negative catalyst. Additionally, concerns over the credit quality in the backdrop of a slowly recovering economy have tempered the estimate revision movements. The higher number of downward estimate revisions indicate a likelihood of downward pressure on the performance of the stock in the near term.
Magnitude of Estimate Revisions
The Zacks Consensus Estimate for the third quarter plummeted to operating earnings of 81 cents per share from 85 cents over the last 7 days. Moreover, estimates for FY11 moved down from earnings per share of $3.90 to $3.83. For FY12, estimates dropped from $4.73 per share to $4.61.
The magnitude of estimate revisions explains why staying away from the stock at current level will be a good decision.
Earnings Surprise
Citi's performance has been volatile over the trailing four quarters with respect to earnings surprises. However, the average earnings surprise was a positive 8.7%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
Our Take
While a number of Wall Street companies have raised their dividends and announced share buybacks, any meaningful return of capital to shareholders still remains elusive at Citi, and this puts the company in the backyard. Besides, due to lack of growth momentum within the company, Citi also needs to go for capital built-up for the regulatory requirements. Hence, meaningful return of capital to shareholders is not expected until 2012.
Citi aims at de-leveraging Citi Holdings through a number of steps that include joint ventures, dispositions and asset run-offs. As a matter of fact, the company has already announced the sale of a number of its businesses within this segment. Though this strategy to shrink non-core assets would improve the valuation over time, the shrinking of the Citi Holdings portfolio would result in revenue challenges, partially restricting the upside potential of the stock.
Though Citi's restructuring efforts are welcome, the sluggish rate of economic recovery and the high level of unemployment are expected to be a drag on its earnings in the upcoming quarters.
The estimate revision trends and magnitude of revision reflect downward pressure on the shares over the near term. Moreover, Citi shares are maintaining a Zacks #5 Rank, which translates into a short-term 'Strong Sell' rating.
With a global footprint, Citi's results give us a cue about the economic indicators and their trends and hence should be analyzed thoroughly. The other major Wall Street biggies reporting after Citi include Goldman Sachs Group Inc. (NYSE: GS) on October 18 and US Bancorp (NYSE: USB) and Morgan Stanley (NYSE: MS) on October 19.
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