24/7 Wall St.

It has been a long time since anyone was excited about an earnings report from International Business Machines Corp. (NYSE: IBM). The earnings for the third-quarter were deemed a success by Wall Street, even if this was the 22nd consecutive quarter with declining revenues. IBM’s stock has been dead for so long that its investors may be in disbelief that the Dow Jones industrial Average just went through 23,000 like a knife through butter.

24/7 Wall St. has held cautious views against IBM for so long now that it’s almost too difficult to try to look positive here. After all, a bad track record and having no control over its narrative is where IBM has been for years.

Things have become hard enough that even the great Warren Buffett decided he had to sell off some of his massive IBM stake owned by Berkshire Hathaway. The question now is whether the positives at IBM outweigh the negatives. It is very possible that the analysts who continue to hate IBM might be holding on to a grudge for too long. Then again, IBM also has disappointed for so long that it’s hard to blame analysts who remain negative.

IBM’s Global Business Services revenue continued to decline, falling by 2% to $4.10 billion, and IBM’s gross margin declined to 45.9% from 46.9% a year ago. The so-called Strategic Imperatives are where the growth is. IBM’s gain after earnings is the best view in years. This Strategic Imperatives saw revenues rise 10% to $34.9 billion over the trailing 12 months, and this now represents 45% of IBM’s total revenues. Here is where some of the gains in revenues were actually seen inside of IBM in the third quarter:

• Cloud revenues increased 20%.
• Revenues from analytics increased 5%.
• Revenues from mobile increased 7%.
• Revenues from security increased 51%.

24/7 Wall St. already covered the earnings report in depth, including the notion that IBM’s full-year 2017 guidance was reaffirmed at $13.80 in earnings per share.

The 25 analysts covering IBM are skewed to being cautious or negative, even after the earnings report. Only six analysts have Buy or Outperform ratings, and 15 analysts have Hold or Neutral ratings. Four analysts have Sell or Underperform ratings. The following are some of the views expressed by analysts after IBM’s third-quarter earnings.

Merrill Lynch reiterated its Buy rating and $200 price objective. Its investment rationale said this:

We view IBM as a defensive investment given its high exposure to recurring sales, cost cutting levers, solid balance sheet, potential share gains, and relatively stable margins. We believe IBM will embark on further cost cutting, and enhance its services and software offerings through acquisitions. Longer term, we expect IBM to take share in IT spending with its Cloud and AI initiatives. We believe 2017 will be the start of a turnaround in fundamentals.

BMO Capital Markets maintained its Market Perform rating but has a $170 target price.

CFRA (S&P) maintained its Buy rating and $175 target price.

Citigroup has a Neutral rating but raised its target to $165 from $160.

Jefferies still has its Underperform rating, but it noted that the software revenues growing 1% is a positive inflection following 13 consecutive quarters of declines.

JMP Securities maintained its Market Outperform rating and $188 target price, citing the risk/reward trade-off with shares at a 2018 P/E multiple of 11 times and offering roughly a 4% dividend yield.

Oppenheimer maintained its Perform rating and trimmed earnings estimates lower based on no clarity in its margins.

Wedbush maintained a Neutral rating and a $155 target price. The firm concedes that results exceeded expectations on strong performance in the company’s Strategic Imperatives but noted that annual margin trends in Services continue to deteriorate and that keeps IBM in a “work-in-progress” mode.

UBS maintained its Neutral rating but raised its target to $160 from $152.

IBM’s post-earnings reaction had shares up 9% at $159.75 late Wednesday morning, with a 52-week range of $139.13 to $182.79. Its consensus analyst target price from Thomson Reuters was $159.82 ahead of earnings.