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TheStreet Open House

Jim Cramer: Watch IBM Earnings on Value Rotation

NEW YORK (TheStreet) -- IBM  (IBM) reports earnings this week and TheStreet's Jim Cramer believes this will be a key item to watch, particularly because of the recent rotation into value stocks.

Cramer says this report is important because this is the lowest valuation of IBM that he has ever seen in 35 years. He thinks next year is a breakout in which 65% or more of the company would be software, which would cause it to grow at a level that it does not have right now.

Another reason to watch this upcoming earnings report is that Warren Buffett has bought so much stake in the company. People have been criticizing Buffett's moves lately, but if they see IBM go higher, then they will look at his other names.

Cramer calls this a classic "value vs. growth" case. IBM has no growth at the moment and revenue is declining, but the money is still going to the tech company. If IBM delivers a decent quarter and the stock surpasses $200, then this would indicate the recent value rotation has legs.

IBM has challenges in China and has been missing quarterly revenue, but Cramer points out that investors know this and yet the stock continues to climb because people think it will get better. If IBM's earnings bring the price down into the $180 range, then Cramer would buy it at that level. If the rotation continues, however, then the stock won't trade down.

Finally, Cramer suggests watching Microsoft  (MSFT) to get a read on how long this rotation will continue. It has not come down this year, but if it starts to slip, then it would provide an indicator for investors.

Must Watch: Cramer: IBM Will Be Buyable Amid Rotation Into Value Stocks

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

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Separately, TheStreet Ratings team rates INTL BUSINESS MACHINES CORP as a "buy" with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate INTL BUSINESS MACHINES CORP (IBM) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, expanding profit margins, good cash flow from operations, increase in net income and notable return on equity. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • INTL BUSINESS MACHINES CORP has improved earnings per share by 11.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, INTL BUSINESS MACHINES CORP increased its bottom line by earning $15.02 versus $14.41 in the prior year. This year, the market expects an improvement in earnings ($17.96 versus $15.02).
  • The gross profit margin for INTL BUSINESS MACHINES CORP is rather high; currently it is at 56.58%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 22.32% trails the industry average.
  • Net operating cash flow has slightly increased to $6,528.00 million or 2.86% when compared to the same quarter last year. Despite an increase in cash flow, INTL BUSINESS MACHINES CORP's cash flow growth rate is still lower than the industry average growth rate of 15.13%.
  • The net income growth from the same quarter one year ago has exceeded that of the IT Services industry average, but is less than that of the S&P 500. The net income increased by 6.0% when compared to the same quarter one year prior, going from $5,833.00 million to $6,184.00 million.
  • Despite the weak revenue results, IBM has outperformed against the industry average of 20.1%. Since the same quarter one year prior, revenues slightly dropped by 5.5%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • You can view the full analysis from the report here: IBM Ratings Report

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

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