IBM To Trade Sideways As Headwinds Persist, Says Barclays

Barclays reiterated its Underweight rating on International Business Machines Corp.IBM as it believes shares could trade sideways or even lower in the near term amid issues with software growth.

The comments came despite IBM reporting better-than-expected fourth quarter numbers and guiding 2017 non-GAAP EPS of “at least” $13.80, versus consensus of $13.73.

The brokerage sees margin structure, IP income and tax headwinds to limit the relative upside potential in the model. Investors would also be concerned over changes in the financing arm to extend credit to higher-risk customers in the emerging markets.

“Do not add to or build new positions, yet. We think there could be near-term tumult,” analyst Mark Moskowitz wrote in a note.

To become more constructive on the shares, Moskowitz says IBM should show more margin stability, amid increasing mix of cloud revenue, and transparency related to IP revenue, not mention Watson.

Moskowitz listed out four factors for his bearish thesis on IBM shares:

• "Software, Watson, IP, Tax. Software was flat Y/Y. We think total software needs to return to mid single digit growth to help put the model on a path to $15-plus long-term earnings power.”
• "IBM still is not providing revenue disclosure related to Watson, which the Bulls have been looking to as the next big catalyst.”
• Greater dependence on IP income is here to stay, but IBM expects IP comps to be a headwind in 2017.”
• "Lastly, tax stands to be a headwind, as the company guided 2017 tax rate to 15% plus or minus three points.”
• Moskowitz raised his price target to $144 from $135.

At last check, shares of IBM were up 0.43 percent to $167.52.