Credit Suisse's 'Below-Consensus' IBM Estimates

International Business Machines Corp. IBM is set to announce its third-quarter performance on October 17, and Credit Suisse sees earnings above consensus, while projecting revenue below Street view. The brokerage also warned that the company may miss the full year EPS outlook.

Analyst Kulbinder Garcha expects IBM to report third-quarter revenue/EPS of $18.8 billion/S3.34 versus consensus of $19.0 billion/S3.24. Garcha forecast FY16 revenue/EPS of $79.0 billion/S13.32 compared to consensus of $79.6 billion/S13.51.

“We see little evidence of an inflection in the business fundamentals. In fact, it is increasingly likely for IBM to miss the full year EPS guidance. We reiterate our Underperform and S110 TP,” Garcha wrote in a note.

Related Link: As Risks Mount For IBM, Look For Shares To Trade Range Bound

Garcha believes the sequential ramp over third quarter and fourth quarter is a challenge and anticipates IBM's organic revenue to decline at an accelerated pace in 2016 at -4.5 percent year-over-year vs -1.8 percent/-1.2 percent in 2014/2015 at constant currency.

“Software's organic decline is accelerating as well at -5 percent year-over-year of 2016 vs -2 percent/-4 percent of 2014/2015. This trend is concerning as the software contributes about half of IBM's PTI,” Garcha noted.

On the valuation front, the analyst said though the headline P/E of 11.5x does look cheap, the shares are about 25 percent above peers on an EV/FCF basis. IBM is currently trading at 15x on EV/FCF basis.

Shares of IBM closed Tuesday’s regular trading at $154.79. The $110 target implies a potential downside of 29 percent.

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