Technology
Why Credit Suisse Sees a Big IBM Shortfall Versus the 2016 Bull-Bear Outlook
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International Business Machines Corp. (NYSE: IBM) is one of the most disliked technology stocks and one of the most disliked Dow Jones Industrial Average stocks. Value investors think IBM is cheap, and Warren Buffett has kept piling in bad cash after bad cash to build his IBM stake higher. One problem is that IBM’s woes seem to persist, whether we have good times or bad times. Now Credit Suisse is out with a friendly reminder that investors need to be very cautious when it comes to Big Blue.
Credit Suisse’s Kulbinder Garcha has been and continues to be the most negative on IBM of all large brokerage firms. Garcha has an Underperform rating and a price target of $125.00. His view is that IBM remains a value trap and that the fourth-quarter earnings report next week will show that IBM is still in a multiyear painful turnaround.
IBM closed out 2015 at $137.62, and the consensus analyst target price at year’s end was $148.85. Just this week, 24/7 Wall St. ran a bullish and bearish outlook for IBM in 2016, and the consensus analyst targets generated an implied upside of almost 14%, if you include IBM’s 3.8% dividend yield. For the Dow to live up to a bullish case of 19,700 in 2016, it must mean a recovery in IBM.
Credit Suisse just doesn’t see that recovery. In fact, Garcha sees IBM reporting $21.9 billion in sales and $4.81 in earnings per share (EPS) for the fourth quarter. Those are against consensus estimates of $22.1 billion and $4.81 EPS. For 2016, Garcha sees IBM generating $79.4 billion in revenue and $14.03 EPS. The consensus estimates are $79.7 billion and $15.02 per share. For 2016, Garcha sees a 0.7% foreign exchange headwind for the revenues and additional headwinds from hedges rolling off.
Garcha sees 2016 as another year of contraction. His report said:
We see a painful multi-year turnaround from here, which leads to a prolonged period of underperformance. We reiterate our Underperform rating and price target of $125… For 2016, we fear another year of declining earnings per share… In addition, we expect standard free cash flow to come in at $10.9 billion in 2016, about $1.6 billion or 13% lower than 2015 free cash flow estimates of $12.6 billion.
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