IBM's Potential Catalysts: Can 'Big Blue' Turn It Around In Q4?

Shares of International Business Machines Corp. IBM hit a new 52-week low of $147.40 on Wednesday after the company reported its second-quarter results, which marked the 21st consecutive quarter of declining revenue.

But not all analysts are ready to throw in the towel and turn sour on the stock. BMO Capital Markets' Keith Bachman maintains a Market Perform rating on IBM's stock with a price target boosted from $165 to $167 amid three potential catalysts.

First, IBM could at the very least see "less bad" fundamentals in the fourth quarter, Bachman said. Specifically, the company could see improvements in operating income from Cognitive Solutions, GBS and Technology Service.

Second, IBM's stock has historically shown strong resistance to further downside to the $140 level as the stock offers at that price point a 4 percent dividend yield.

Third, while many investors have rightly "given up" on IBM after many years of weak fundamentals and performance, but based on a free cash flow valuation metric the stock will soon again become compelling to buy again.

Despite the three catalysts, the analyst remains on the sidelines as any strength in the fourth quarter may not be sustainable over the longer-term. It's also likely IBM's Watson isn't winning over new workloads and customers.

UBS: 2017 On Track But 2018 A Concern

UBS' Steven Milunovich's takeaway from the earnings report was that "Big Blue" should have raised its 2017 guidance as the current EPS estimate of $13.80 appears to be achievable.

However, after 2017 comes to an end the next year could bring IBM a higher tax rate and lower cost savings which is of concern to the analyst despite signs of the business stabilizing.

The analyst also highlighted five factors that call into question the longer-term sustainability of strategic imperative investments in SMAC (social, mobile, analytics, and cloud), including 1) growth is starting to slow and was offset yet again by declines of the core franchise in the quarter, 2) the services backlog was down 4 percent year-over-year, 3) the company as a whole suffered another gross margin decline which calls into question if it truly is shifting to a higher margin revenue model, 4) Infrastructure Services, the largest part of GTS, fell 5 percent, and 5) transaction processing software was down 5 percent.

Bottom line, analyst's "earnings quality concerns" justifies a Neutral rating on IBM's stock but with a price target lowered from $167 to $159.

Related Links:

5 Biggest Price Target Changes For Wednesday

25 Stocks Moving In Wednesday's Pre-Market Session

Image: By Clockready (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0), via Wikimedia Commons

Market News and Data brought to you by Benzinga APIs
Comments
Loading...
date
ticker
name
Price Target
Upside/Downside
Recommendation
Firm
Posted In: Analyst ColorPrice TargetAnalyst RatingsBMO Capital MarketsIBM earningsIBM WatsonKeith BachmanWatson
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!