The Sell-Side Less Than Impressed By IBM's Q4 Beat

International Business Machines Corp. IBM may have reported better-than-expected fourth quarter numbers and guided FY 2017 EPS modestly above consensus. But, sell-side analysts are not impressed by the results as they look for better earnings quality, improvement in organic growth and margin stability.

Barclays: Underweight

Barclays reiterated its Underweight rating on IBM as it 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.

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

Goldman Sachs: Neutral, $145 PT

Meanwhile, Goldman Sachs’ James Schneider said organic revenue inflection is needed to drive multiple expansion from current levels. He remains Neutral-rated on the stock, with a price target of $145, and looks for evidence of sustained improvement in software & services revenue.

Deutsche Bank

Deutsche Bank too prefers to take a wait-and-watch approach on IBM shares due to low earnings quality and decline in core business. Analyst Sherri Scribner is of the view that IBM’s profitability metrics continue to degrade and all segments, except technology services and cloud, saw organic sales declines.

BMO: Market Perform, $170 PT

In addition, Keith Bachman of BMO feels IBM reported a mixed quarter, with weak margins being offset by higher royalty income and a lower tax rate. Nevertheless, Bachman is encouraged by the comments around pre-tax income growth, and strategic revenues reaching 44 percent of the total revenues. Bachman has a Market Perform rating on the stock, with a price target of $170.

RBC: Sector Perform, $170 PT

RBC analyst Amit Daryanani too maintains his Sector Perform rating on the stock, despite being encouraged by the positive outlook commentary. He has a target price of $170 on the stock.

“While we are encouraged by commentary around return of PTI growth and potential for FCF to be flat y/y in CY 2017, we think investors may await more tangible signs of these occurring or a more attractive entry point before getting positive on the name,” Daryanani wrote in a note.

Morgan Stanley: Overweight, $187 PT

On other hand, Morgan Stanley’s Katy Huberty maintains an Overweight rating on the stock, with a price target of $187. Despite saying the results is unlikely to influence either the bulls or the bears, the analyst pointed out that IBM is seeing stabilizing revenue and a return to pre-tax income growth. These are signs that the company’s transformation is bearing fruit.

At last check, shares of IBM gained 1.63 percent to $169.53. The stock is trading near its 52-week high of $169.95.