IBM Earnings 'Unlikely To Influence Bulls Or Bears'

Morgan Stanley’s Katy Huberty pointed out that International Business Machines Corp. IBM is seeing stabilizing revenue and a return to pre-tax income (PTI) growth, while CIO feedback is improving, all of which are signs that the company’s transformation is bearing fruit.

Huberty maintained an Overweight rating on the company, with a price target of $187.

Transformation Working

“Coming into 2017, we saw stabilizing revenue growth and a return to PTI dollar growth as Strategic Imperatives approach 50 percent mix,” the analyst mentioned.

Huberty also highlighted signs of operating leverage in the cognitive and cloud businesses, which indicate PTI could improve further in 2018.

“Key to this view is a sustainable recovery in revenue which is supported by our recent CIO survey. Based on feedback of 100 CIOs, IBM now leads all legacy IT vendors on expected wallet share over the next three years,” the analyst said.

The feedback from 60 hardware IT executives was even more positive, since they now expect to spend with IBM growing, as compared to the decline expected three months ago.

Mixed Bag

The analyst believes that with the Q4 results being a mixed bag, it was unlikely to influence either the bulls or the bears.

“Cloud was the highlight of the quarter with as-a-service growth of 63 percent Y/Y and margins expanding for the first time,” Huberty noted.

Constant currency revenue declined 0.7 percent, which was an improvement over the 1.1 percent decline in the September quarter, despite lower acquisition benefit and a higher mix of declining transactional revenue.

However, Cognitive Solutions did not accelerate during the quarter, while Global Business Services reported revenue and margins below the estimates.

In addition, Huberty noted that “2017 guidance implies stable revenue and FCF and growing pre-tax income and EPS.”