IBM Earnings Dissappoint -- As Expected

IBM's second-quarter earnings report has just hit the wires and the stock has dropped over 3.25% in after-hours trading. Revenue was below analysts' consensus at $23.7 Bil, while EPS came in at $2.61 per share. I published my estimates for the Tech Giant on June 15th and advised my readers to "Buy Puts" just before today's market close. Once again, it appears that another Trading Recommendation has been proven accurate.  If the stock opens tomorrow's session at it's current after-market price, those who followed my advice would incur a gain on their option position of approximately 30%.

IBM's Q2 Earnings Report

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Disclaimer:
· At the time of publication, I do not have any open positions.
· Opinions, estimates and projections contained in this report are of the author as of the date published and are subject to change without notice.
· This report is not, nor should it be construed as, an offer to sell or solicitation of an offer to buy any securities.
· Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor.
· It is important to do your own due diligence on any position you enter.

Another Successful Trading Recommendation

Quick Update on Family Dollar:

Yesterday, Family Dollar Stores ("FDO") reported earnings that disappointed the Street. For my readers and followers, this was not a surprise. Early Tuesday, July 6th, I wrote the following:

FDO shares have risen nearly 40% since the start of the year. If estimates do come in below analysts’ consensus as I anticipate, shares should fall quite precipitously.

I also gave a Trading Recommendation on the stock--Buy Puts. The day after the earnings announcement (Wednesday), shares closed with an 8.22% drop. On Tuesday just before the close, I actually followed my own advice and bought August puts, which I sold the next day for an 80%+ gain.

So far this earnings season I have given my readers correct Trading Recommendations on both Research in Motion ("RIMM") and FDO. RIMM fell 10.84% the day after its announcement and FDO dropped 8.22%. Monday, July 12th, marks the official beginning of the season. Estimates and recommendations have already been posted for companies like AT&T, UPS, CSX, Seagate Technology, United Healthgroup, IBM, Intel, Google, Exxon Mobil, and Hewlett-Packard.

If you are not already a Follower, be sure to click the "Follow" button in the right portion of your screen so you can catch all of my new posts as soon as they're released!

Disclaimer:
· At the time of publication, I do not have any open positions.
· Opinions, estimates and projections contained in this report are of the author as of the date published and are subject to change without notice.
· This report is not, nor should it be construed as, an offer to sell or solicitation of an offer to buy any securities.
· Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor.
· It is important to do your own due diligence on any position you enter.

Tech Battle: IBM & Intel

IBM Corp.

Q2 Rev. Est.:  $24.11 Bil

Q2 EPS Est.:  $2.54

Analysts, on average, are forecasting second-quarter revenue of $24.23 Bil with an EPS of $2.58.  Both of these figures are slightly higher than my estimates of $24.11 Bil and $2.54, respectively.

In order to arrive at the above estimates, I averaged the results of four types of statistical regression:  First-Order Linear, Deseasonal, Dummy Coding, and Autoregression, as summarized in Table 1, below.

Table 1

Q2 Prediction
Model	Prediction
First-Order		$24,745
Deasonal		$24,546
Dummy		$24,834
Lagged		$22,294
AVERAGE		$24,105

After the Q2 revenue prediction was finalized, the next step involved using common size analysis to create the pro-forma income statement.  Despite the fact that IBM is a large and relatively mature company in the Technology sector, their earnings as a percentage of revenue is somewhat volatile.  Given this, I have confidence that each line of the below income statement is a good prediction of the quarter’s actual results. 

Income Statement
Three months ended June 30, 2010
Revenue	$24,105
Cost of Revenue	$13,105
Gross Profit	$11,000
Operating Expenses:
SG&A	$5,335
R&D	$1,463
Int. Property	-$292
Other Ex	-$155
Interest Ex	$87
Total Expenses	$6,438
Income before Taxes	$4,562
Provision for Taxes	$1,189
Net Income	$3,372
Diluted EPS	$2.54

IBM Corp. will report earnings on July 19, 2010 after the market close.

Trading Recommendation:  Buy Puts

Intel Corp.

Q2 Rev. Est.:  $10.33 Bil

Q2 EPS Est.:  $0.45

Analysts, on average, are forecasting second-quarter revenue of $10.26 Bil with an EPS of $0.43 for Intel ("INTC").  Both of these figures are slightly lower than my estimates of $10.33 Bil and $0.45.

When arriving at the Q2 revenue forecast, I once again averaged the results of the First-Order Linear, Deseasonal, Dummy Coding, and Autoregression models.  However, unlike the models created for IBM, the models for Intel resulted in a much lower level of significance (R^2).  The absolute average of the company's EPS surprises over the past year is 63%.  This shows just how volatile Intel’s revenue can be from one quarter to the next.  Given this unpredictability, I will not be giving a Trading recommendation for INTC. 

Below is a summary of the composition of the Q2 revenue estimate (Table 2) as well as the projected income statement (Table 3).

Table 2

Q2 Projection
Model	Prediction	W/ St. Err.
First-Order	$9,403	$10,466
Deasonal	$8,899	$10,256
Dummy	$8,884	$9,974
Lagged	$9,528	$10,627
AVERAGE	$9,179	$10,331

Table 3

Income Statement
Three months ended June 30, 2010
Net Revenue	$10,331
Cost of Sales	$3,713
Gross Margin	$6,617
R&D	$1,570
MG&A	$1,469
R&D AND MG&A	$3,038
AMD Settlement	$0
European Commission Fine	$0
Restructuring & AI Charges	$0
Amortization	$12
Operating Expenses	$3,050
Operating Income	$3,568
Gains/(Losses) on Investments	-$10
Interest and other, net	$17
Income Before Taxes	$3,575
Provision for taxes	$1,033
Net Income	$2,543
Diluted EPS	$0.45

Intel Corp. will report earnings on July 13, 2010 after the market close.

Trading Recommendation:  None


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IBM/INTC Ownership

Author:   NO

Author’s Family:  NO

Disclaimer:
· Opinions, estimates and projections contained in this report are of the author as of the date published and are subject to change without notice.
· This report is not, nor should it be construed as, an offer to sell or solicitation of an offer to buy any securities.
· Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor.