A Few Reasons Why IBM Bears Are Still Growling Even After Q3 Beat

Despite the third-quarter earnings beat by International Business Machines Corp. IBM, bears are still complaining. What exactly are they fretting over?

UBS maintained its Neutral rating but raised its price target from $152 to $160, shifting to 11 times its 2018 earnings per share estimate of $14.20.

Bears Still Growl

Analyst Steven Milunovich said bears are likely to be concerned over a few factors, including mainframe growth likely contributing at least a point to imperatives acceleration. The analyst also noted some of the software growth is non-recurring.

The analyst said the total services backlog fell 2 percent year-over-year. Additionally, over $4 billion of tax credits/NOLs could result in a tax rate below the normalized 15 percent rate going forward, the analyst added.

See Also: Big Blue's Big Beat: Is IBM's Q3 The Real Deal Or A Flash In The Pan?

Dissecting the Q3

However, UBS noted the third-quarter results were characterized by above-consensus revenues, led by Cognitive Solutions, a narrowing of the year-over-year margin gap and positive currency impact.

Cognitive Solutions saw revenue growth of 3 percent, with gains in both Solutions Software and Transaction Processing. The former is sustainable, while the latter is more temporary, the firm said.

UBS also noted that margins, though down year-over-year, have seen the gap narrowing, as Strategic Initiatives that has higher margins seeing 10 percent growth, an acceleration from 7 percent last year.

UBS said overall, the results suggested stabilization and noted that earnings quality was better, with a 15 percent tax rate and lower intellectual property income.

Looking Ahead

UBS said concerns regarding the steep second-half ramp required to make at least $13.80 per share in earnings appear overdone.

"We continue to believe that cost savings from last year's restructuring along with slowing investment spending are aiding segment pretax margins," Milunovich added. He believes the stock is about fairly valued at current levels.