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Why International Business Machines Corp. Shares Jumped 10% Higher Today

By Anders Bylund - Oct 18, 2017 at 1:04PM

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Third-quarter results came in above Wall Street's targets, and management expects a return to earnings growth in the next quarter.

What happened

Shares of IBM ( IBM 0.59% ) soared in Wednesday's morning session, rising 9.7% as of 11:20 a.m., Eastern time. Big Blue reported third-quarter results Tuesday night, exceeding analyst expectations and showing signs that its long-running strategy shift is starting to pay off in the second half of 2017.

So what

IBM's third-quarter results were flat year over year, as adjusted earnings stayed at $3.30 per share and revenues were unmoved at $19.2 billion. Analysts would have settled for earnings of $3.28 per share and sales near $18.6 billion, so Big Blue beat the Street's revenue targets by a wide margin. Full-year guidance targets were reiterated, and CFO Martin Schroeter shared a positive view of IBM's strategic makeover progress:

"Ninety days ago, I talked about planting the flag to mark the beginning of an improvement of the trajectory of our business, which would result in a second half that was improved over the first," Schroeter said. "Now in the third quarter, we've improved our year-to-year revenue and margin trajectory."

IBM's classic logo, blue stripes on white background.

Image source: IBM.

Now what

IBM's strong results rested on 11% growth among the so-called strategic imperatives, led by 20% higher cloud computing sales. The Z System line of mainframe servers presented a new product generation two weeks before the end of the quarter, sparking a 62% year-over-year boost to mainframe sales.

This mixture of new and old business drivers -- with the caveat that IBM's 14th-generation mainframes come with forward-looking features such as forced data encryption and blockchain computing support -- is paving the way toward modest year-over-year earnings growth for the first time since the second quarter of 2014.

Following this morning's jump, IBM shares are trading 4% lower year to date and can be bought for the bargain-bin ratio of 11.7 times trailing earnings. As an IBM owner myself, I see plenty of room for further gains as the strategic imperatives continue taking charge of Big Blue's overall operations.

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