Analysts Debate IBM: One-Time Fluke Or Sustainable Recovery?

Tech giant IBM IBM reported a fourth-quarter earnings beat and encouraging guidance for the full year 2019. With the stock still down 25 percent from a year ago, the Street isn't fully convinced "Big Blue" is at the beginning of a sustainable long-term turnaround.

The Analysts

• Wells Fargo's Ed Caso maintains a Market Perform rating on IBM with a price target lowered from $155 to $140.
• Bank of America's Wamsi Mohan maintains at Buy, unchanged $165 price target.
• Bernstein's Toni Sacconaghi, Jr.
• Wedbush's Moshe Katri maintains at Neutral, unchanged $165 price target.

IBM shares traded higher by 7.8 percent to $132.14 at time of publication.

Wells Fargo: Slow And Steady

IBM's earnings report was "solid" and highlighted by continued improvement in services and stability in Cognitive but mainframe was up against difficult comparisons, Caso said in a research note. IBM's 2019 outlook came in mostly in-line with expectations, although the contribution from the Red Hat acquisition wasn't included.

Caso said the bullish case for IBM's stock can't yet be made despite "slow but steady progress" on a transition of its business. A downward revision in IBM's stock is warranted amid a lower market multiple of 10 times 2020 estimated non-GAAP EPS.

Bank Of America: 5 Things To Like

IBM's earnings report is highlighted by five key takeaways, Mohan said. These include:

• Services revenue and gross margins improved with notable strength in consulting and signings;
• Cognititive revenue growth was driven by a strong transactional quarter;
• GBS margins improved due to strong operating leverage;
• Management's 2019 free cash flow guidance of $12 billion factors in headwinds like cash tax and divestitures; and
• Operating leverage from prior restructuring initiatives were mostly offset by asset sales to HCL Technologies.

Related Link: Wall Street Divided On Buying The IBM Dip

Bernstein: Is This A Blip?

Sacconaghi said IBM projected a "bullish tone" in its results although the company achieved its fiscal 2018 EPS goal thanks to a $1.22 per share benefit from a lower tax rate. Looking forward to 2019, the company will continue benefiting from a lower than expected tax rate and the asset sale to HCL -- both of which are two non-operating items.

Not included in IBM's guidance is the contribution from Red Hat which the analyst says is likely to be incrementally dilutive to EPS.

Wedbush: No Change To Structural Concerns

IBM's "better-than-feared" earnings and guidance is likely overshadowing ongoing structural issues, Katri said. For example, investors are focused on high renewal rates in quarterly bookings but at the expense of ongoing margin compression on IBM's legacy software and services operations.

IBM's ongoing structural headwinds will continue to impact both the software and services business, which prevents a more constructive valuation on the stock.

Photo credit: Mark Ahsmann (Own work), via Wikimedia Commons