IBM (IBM) reported third-quarter fiscal 2017 results after Tuesday's close. The company reported earnings per share of $3.30 (vs. the consensus estimate of $3.28) on $19.2 billion in revenue. Revenue was nearly $600 million better than expected.
IBM said its tax rate was 11%, below the previous guidance of 12%-18%, which helped boost its bottom-line results. But the lower-than-expected tax rate game is already pretty well known by IBM investors. For example, in the second quarter, the company had $180 million worth of tax benefits and a $1.4 billion share buyback, which resulted in a "blowout" quarter $0.23 ahead of the Wall Street consensus estimate (on a 4.7% decline in revenue). But what's different this time is the better-than-expected revenue. After all, investors were expecting another 3%-5% revenue drop.
Although this was technically the 22nd straight quarterly drop in revenue, sales fell just 0.4%. Cloud revenue jumped 20% to $1.4 billion, revenue from mobile was up 7% and security increased 51%.
IBM's "Strategic Imperatives" revenue was up 12%, driven by cloud, mobile, security and analytics. Investors have been watching the Strategic Imperatives segment for signs that IBM could finally produce some revenue growth.
Management reaffirmed guidance for the rest of fiscal 2017. The company sees earnings of "at least" $13.80 per share vs. the consensus estimate of $13.75. Management expects a fourth-quarter tax rate between 12% and 18%.
Look, this wasn't a speculator quarter, but it does seem IBM is headed in the right direction. I think the shares will pop higher driven by a relatively low valuation and a turnaround in the negative sentiment that surrounds the company.
The one-year chart of Microsoft reminds me of the time I climbed Mt. Everest. The stock is up 35% in the last 12 months.
Back in July, Microsoft reported a strong fourth quarter. The company posted earnings of $0.75 per share, which was $0.04 better than expected. Revenue jumped 9.1% to $24.7 billion versus the $24.29 billion consensus estimate.
I think Microsoft can keep up the momentum. Microsoft's cloud bookings are strong. Azure bookings were up an estimated 98% year over year. Azure has about $5 billion in revenue and could add another $2 billion next year. Azure's gross margins are climbing. As cloud capital expenditures by the company slow, Microsoft should gain some earnings leverage. Indeed, cloud gross margins easily could double from 20% to 25% to 40% to 50% next year, which would help to drive Microsoft's overall gross margin from 61.9% in fiscal 2017 to near 65% in fiscal 2018. With decent revenue growth, Microsoft should be able to beat the consensus estimates all next year, which should keep the stock on track.
The other old-tech name everybody wonders about is HP. Year to date, shares of HP are up an incredible 47%. The stock has been surging on a better-than-expected profit outlook.
At HP's analyst day last week, management told investors it expects earnings per share this coming year of $1.74 to $1.84, which is $0.03 higher than most expected.
While many investors were impressed with the company's presentation regarding 3D printing, I just can't get excited about the printing business. More than 70% of HPQ's profits come from printing and accounts for just 30% of revenue. Printing revenue has declined an average off 7% per year for the last five years. What's so exciting about that?
In my opinion, IBM is the best bet in old tech. The stock has a low valuation and with a 4% dividend yield you get paid while waiting for the negative sentiment to turn around. A little spark and the stock should take off.
Personally, I don't think HP can figure out a way to grow profits when it remains so dependent on printing. Microsoft should be able to continue its run, but its valuation is pretty extended and any disappointment could lead to a nasty correction.
This post was updated at 5:20 p.m. ET Tuesday to include IBM results.