IBM's Growth Fueled by Cloud Computing

BOSTON ( TheStreet Ratings) -- IBM ( IBM) is scheduled to report second-quarter earnings after the stock market closes today, with analysts forecasting year-over-year improvements in earnings and revenue.

Analysts are expecting the global technology firm to report earnings per share of $3.03, compared with $2.61 a year earlier. Revenue is estimated to increase 7% to $25.4 billion from $23.7 billion due to improved demand within its systems technology segment. Growth in IBM's cloud offerings are also providing a source of growth, as management has noted that cloud related revenue is expected to double in 2011.

The following is taken from a first-quarter report published by TheStreet Ratings, an independent-research unit of TheStreet that uses a quantitative model to evaluate stocks.

IBM improved earnings per share by 17.3% 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, IBM increased its bottom line by earning $11.58 versus $10.01 in the prior year. This year, the market expects an improvement in earnings ($13.20 versus $11.58).

We rate IBM a "buy." This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. Our model maintains a price target of $228 on shares of IBM, indicating the potential for 30% upside from current levels.

The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, revenue growth, notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow.

The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the IT Services industry and the overall market, IBM's return on equity significantly exceeds that of both the industry average and the S&P 500.

>>For upcoming earnings and estimates, see our Earnings Calendar.

Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by over 35% in the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, IBM should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.

From a valuation perspective, IBM's price-to-earnings ratio indicates a discount compared to an average of 20.27 for the IT Services industry and a value on par with the S&P 500 average of 16.16. Conducting a second comparison, its price-to-book ratio of 9.30 indicates a significant premium versus the S&P 500 average of 2.18 and a premium versus the industry average of 8.24. Furthermore, the price-to-sales ratio is well above the S&P 500 average, but well below the industry average.
Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser. Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.