Is Tech Spending Back? Investors Expect Big Earnings from Big Blue

Investors are betting on IBM in advance of its earnings report Monday.
Investors are betting on IBM in advance of its earnings report Monday.

The weekend's just starting, but some investors already seem to be looking forward to Monday, when tech icon IBM (IBM) is set to report earnings. After Intel's (INTC) stellar earnings report earlier this week, Wall Street is expecting a strong performance from Big Blue.

In advance of the filing, options traders have been betting the company's share price will rise. On Wednesday, for example, Reuters reported that options traders exchanged 97,000 call options in IBM, which gives them the option to buy IBM stock at a predetermined price.

That volume amounts to "nearly six times the average daily turnover and three times more than [IBM's] put options," according to the story, which cites option analytics firm Trade Alert. (Put options are the opposite of call options, giving holders the ability to sell shares for a set price.)

Stock is Cheap

So far, IBM shares are flat compared to the beginning of the year, and -- with a forward price-to-earnings ratio of 11 -- IBM looks cheap. A forward price-to-earnings ratio divides a stock's price per share with its expected earnings per share, reflecting the anticipated future value of the stock.

In January's earnings announcement, IBM handily beat analyst expectations, while also offering a strong earnings outlook for the rest of the year, and investors are looking for a repeat performance. In 2009, IBM broke records for earnings per share, net income and free cash flow, also growing its cash hoard to $15.1 billion.

After corporate technology spending had dried up during the recession, the January results were among the very first indications that companies were starting to spend money on technology again, particularly in the hardware space. Investors will be watching closely Monday to see if the bellwether company's latest results continue to reflect growing corporate spending, a key component of the U.S. economic recovery.

Great Expectations

IBM has beaten expectations for the last nine quarters in a row, and as the economy continues to pick up the pace, that trend should continue. "We are confident about 2010 and our ability to achieve the high end of our long-term roadmap," IBM CEO Samuel Palmisano said back in January.

On Monday, Wall Street analysts expect IBM to report first-quarter earnings of $1.93 per share on revenue of $22.8 billion, versus a profit of $1.70 per share last year. "Investors hope that the Intel spillover and positive news from their earnings and earnings call will be the same for IBM," TD Ameritrade chief derivatives strategist Joe Kinahan told Reuters.