IBM Gives Big Mixed Picture: Earnings to Outlook (IBM, DIA, SPY, CVX, MCD)

International Business Machines Corporation (NYSE: IBM) has now reported its third quarter earnings report at $3.28 EPS and $26.2 billion in sales.  Thomson Reuters was looking for $3.22 EPS and $26.25 billion in sales.  You might have expected that this is “good enough” considering the market action from July through October, but investors have to recall that IBM just hit an all-time again last week.  Our take is that this could create a large impact in the DJIA via the SPDR Dow Jones Industrial Average (DIA) versus the S&P 500 vis the SPDRs S&P 500 (NYSE: SPY).
 
IBM has also raised guidance for 2011 to at least $13.35 EPS from at least $13.25 EPS.  This is above targets but frankly it is also valuing IBM at a large premium to the bulk of the large technology players today.

Maybe you want to blame services, maybe you want to blame the currency adjustment creating only 3% growth from a year earlier. 

Our take: blame the backlog of future services ordered but not yet fulfilled, billed, and counted as revenues.  This is perhaps the greatest measure of future revenues over the next 12 to 36 months.  In June the figure for backlog was about $144 billion.  The September-end figure was down to $137 billion.

Keep in mind that IBM is the single largest weighting of the Dow Jones Industrial Average by a long shot.  That price-weighted index from IndexArb.com counts IBM as being more than 12.3% of the entire weighting of the 30 components, which is effectively the same as the next two largest components of Chevron Corporation (NYSE: CVX) and of McDonald’s Corporation (NYSE: MCD). 

Why this matters is that a 4% drop can count as close to a 0.5%% implied drop for the DJIA even if every other 29 of the 30 DJIA components were flat.  IBM shares closed down 2% at $186.59 today, and the stock is down almost 4% in the after-hours session and under $180.00 versus a 52-week range of $136.70 to $190.53.

JON C. OGG