UBS Upgrade Gives IBM Shares A Boost

The bullish case for IBM IBM is based on a combination of conservative Street expectations, under-appreciated catalysts and a compelling valuation, according to UBS.

The Analyst

UBS's John Roy upgraded IBM from Neutral to Buy with a 12-month price target lifted from $160 to $180.

The Thesis

Expectations call for IBM to report a 2-percent decline in revenue but in reality revenue should grow 0.3 percent in 2019 and more in 2020, Roy said in the note. The revenue growth will likely come from Analytics, which could add $400 million in revenue next year and $750 million the year after. Encouragingly, IBM is now entering a period of sustainable growth -- a view backed up by a survey of 150 technology executives all of whom said some form of cognitive computing project is underway.

Meanwhile, IBM boasts a few catalysts that should support the stock, including:

• 130 basis point improvement in operating margin from better Services.
• Watson hype cycle bottoming in 2018.
• An attractive 4.4 percent dividend yield that offers a floor for the stock.
• Limited public cloud exposure at just 10 percent.

Roy's revised $180 price target is based on a 12.5 times multiple on 2019 estimated EPS of $14.25, which implies a 30-percent discount to the S&P 500 index and towards the high-end of its five year average.

Price Action

Shares of IBM were trading higher by 2.7 percent Wednesday to $152.99.

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