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No. of Recommendations: 7
IBM Roundup: Analysts Split On Stock’s Prospects

CLSA’s Ed Maguire reiterated an Outperform rating and $225 price target. “IBM’s 3Q was mixed as margin expansion across the business offset FX headwinds, Americas revenue softness and weak hardware sales. Management noted large infrastructure software deal slippage in the Americas, hesitating to blame the economy. Europe and Asia were steady and Japan improved. Key focus areas including Analytics, Smarter Planet, Cloud and Growth markets continue to track well, though management continues to need to rebalance the workforce to drive operational leverage to offset maturing and late cycle offerings.”

Credit Suisse’s K. Garcha reiterated a Neutral rating and $200 price target: “Post 3Q12 results, we modestly adjust our 2012/2013 EPS estimates to $15.13/$16.83, respectively. This quarter, execution was mixed with some software deals slipping out of the quarter and hardware sales weak ahead of a new product cycle. Much of this is temporary, in our view. Despite the quarter’s bumps, IBM’s transition to higher value services, increased operational efficiency and targeted M&A should allow for a steady march to the company’s 2015 roadmap of $20 in EPS, if not more.”

Deutsche Bank’s Chris Whitmore maintained a Buy rating: “Results were impacted by deal slippage in 3Q (SW deals in U.S. and EM) and softer than expected HW results (demand pause ahead of HW refresh). Despite the uncharacteristic quarter, we believe IBM’s high recurring profit stream, improving EPS visibility related to the HW cycles along with cost actions & improving margin dynamics remain intact. At ~$204 in the aftermarket (12x FY13E EPS) we continue to view IBM as attractive.”

Janney Montgomery Scott’s Joseph Foresi downgraded the stock from Buy to Neutral, with a $209 price target: “IBM’s results face headwinds in the short term from more than just macro factors as the company’s GBS business (18% of revenue) struggled in 2012, declining the last three quarters including the most recent quarter despite a stable Japan. The company has margin leverage to protect earnings, but that runway will become tougher in the face of declining revenues. The stock has had a nice run – up 40% since the end of 2010, 11% since last reporting, and hitting an all time high this month. IBM is currently trading at 12.5x 2013 results consistent with its historical average. The company will need to improve its execution to justify multiple expansion from these levels.”

Jefferies’ Peter Misek reiterated a Hold rating and $225 price target: “Q3 revenues were light due to weakness in the month of Sep and Software/Services softness, but IBM managed to beat consensus EPS of $3.62 (St $3.61, JEF $3.62) due to solid expense execution. The surprising Software miss was due to a handful of deals being pushed out in emerging markets. We maintain our above-consensus 2012 EPS estimate but trim 2012 and 2013 revenues.”

RBC Capital Markets’ Amit Daryanani reiterated a Neutral rating: “IBM’s System & Technology segment (hardware business) revenues came in at $3.9B, down 13% y/y (down 9% in constant currency and ex Retail Store Solutions). Total Systems sales (excluding FX and the divestiture of RSS) fell 6% y/y with the largest declines noted in Z-series servers (down 19% y/y) and Storage (down 8% y/y). IBM noted that while the month of July and August were stable they saw notable softness in the month of September. We believe IBM’s results are a mixed bag for the technology supply chain. However, should the softness in the month of September, persist through Dec-qtr it could negatively impact IBM’s supplychain.”

Sterne, Agee & Leach’s Shaw Wu reiterated a Buy rating and $230 price target: “IBM reported a surprisingly in-line quarter and guidance. This was slightly disappointing given the company’s strong track record of “beating and raising.” However, we are not overly concerned as issues appear short-term in nature where a few larger software deals closed after quarter end and likely pause ahead of new hardware refreshes. We see the company benefiting in upcoming quarters from a powerful product cycle led by new Power7+ processors, high-end Systemz servers, and PureSystems.”

Stifel Nicolaus’ David Grossman reiterated a Buy rating and $243 price target: “The biggest surprise was the deceleration in software and services revenue growth, which were up 3% and flat, respectively, and discussed in more detail below. Hardware deceleration was anticipated in front of the new product cycles. Pretax margin was up 250bp y/y as the combination of mix, headcount rebalancing, process improvement among other initiatives continues to positively impact the business. Share count was down nearly 5% and contributed the balance of the y/y growth in EPS. Management maintained 2012 guidance of “at least” $15.10. We are trimming our 2012 and 2013 estimates modestly—2012 goes from $15.23 to $15.17 and 2013 goes from $16.94 to $16.85–to reflect the in line quarter as we had expected a modest beat.”

Wells Fargo’s Maynard Um reiterated a Market Perform rating: “Good Services signings, but revenues and margins soft; Hardware slowed, but new products in Q4. Signings of $13.3B beat our $12.8B est (Street: $12.4B) driven by outsourcing. GTS revenues were below ests because increase in revenues from backlog was offset by weakness in new business generated within the qtr. Pre-tax margins declined sequentially and were below our est partly due to soft revenues. System z sales were soft because customers paused ahead of the new system launch (shipping only 11 days in the qtr), but Q4 ramp is expected and IBM expects 25-30% yr/yr growth in these systems. Storage and Power 7 revenues are also expected to ramp due to new product launches. However, System x is expected to remain challenged given an uncertain macro.”
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