What Do Analysts Think About International Business Machines Corporation's (NYSE:IBM) Profit Growth?

International Business Machines's encouraging earnings sentiment drives analysts to forecast meaningful growth of 88.24% in the coming 12 months, but let's stop and consider this projection. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this growth, as there are certain implications that can impact on shareholder return. To get a preliminary understanding, this article will interpret International Business Machines's margin performance to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for IBM's returns relative to its competitors.

View our latest analysis for International Business Machines

Breaking Down IBM's Profit Margin

In general, the value that accrues to equity holders is partly reliant on the ability of a company to convert sales revenue in to earnings. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating IBM's profit margin.

International Business Machines's margin has contracted in the past five years, with net income declining at -7.29% on average, which was more than the average fall in revenue of -5.79%, meaning that the decrease in revenue has coincided with a smaller portion falling to the bottom line. The current 7.28% margin seems to continue this movement, indicating that the earnings decline has likely been driven through an increase in cost alongside the the decline in revenue.

What can we tell from future expectations?

Forward looking projections suggest margins will shift towards expansion, with an expectation of 0.90% in annual revenue growth and annual net income growth forecasted at 15.51%. This suggests the previous earnings decline is expected to reverse due to enhanced cost efficiency alongside revenue increases. But as a result of improved cost efficiency, net income growth is expected to exceed revenue growth, which is causing the expectation for margins to expand. However, those interested in the company should remember that a expanding margin has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research.

In many situations, looking at a company's profit margin in relation to other similar businesses can be more informative. In International Business Machines’s case, it is expected that profit margins will expand simultaneously with IT industry margins, and at the same time, the forecasted ROE of International Business Machines is greater than the industry at 67.60% and 13.56% respectively, although it must not be forgotten than this result is influenced by the company's debt levels. This suggests that analysts expect International Business Machines's return per dollar of equity will exceed the industry due to the earnings attributes identified in our margin analysis. However, margins use items on the income statement that are prone to being manipulated by various accounting measures, which can distort our analysis. Thus, it is essential to run your own analysis on International Business Machines's future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.

Next Steps:

For IBM, there are three pertinent aspects you should look at:

1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is IBM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether IBM is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of IBM? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.