Are Analysts Overly Optimistic After IBM’s Q3 Report?
Investors were hugely disappointed with IBM’s report and sent shares lower, making it the worst performing Dow stock on Wednesday. Yet, analysts maintained optimism for the tech giant, looking past this hiccup.
After International Business Machines Corp. (NYSE: IBM) reported its third-quarter financial results after the markets closed on Tuesday, investors ultimately were hugely disappointed and sent shares lower, making it the worst performing Dow Jones industrials stock on Wednesday. However, analysts maintained optimism for the tech giant, looking past this hiccup.
24/7 Wall Street has included some brief highlights from the earnings report, as well as what analysts are saying about the firm after the fact.
Big Blue said that it had $3.42 in earnings per share (EPS) and $18.8 billion in revenue, compared with consensus estimates of $3.40 in EPS and $19.1 billion in revenue. The same period of last year reported had EPS of $3.26 and $19.15 billion in revenue.
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In terms of its segments, IBM reported as follows:
- Cognitive Solutions (includes solutions software and transaction processing software) — revenues of $4.1 billion, down 6% (down 5% adjusting for currency), with growth in Watson health, security solutions, and key strategic areas in analytics.
- Global Business Services (includes consulting, application management and global process services) — revenues of $4.1 billion, up 1% (up 3% adjusting for currency), led by consulting. Gross profit margin increased 270 basis points.
- Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) — revenues of $8.3 billion, down 2% (flat year to year adjusting for currency), with growth in cloud revenue. Gross profit margin increased 120 basis points.
- Systems (includes systems hardware and operating systems software) — revenues of $1.7 billion, up 1% (up 2% adjusting for currency), driven by growth in Power and IBM Z.
- Global Financing (includes financing and used equipment sales) — revenues of $388 million, down 9% (down 7% adjusting for currency).
As for the analysts, Nomura Instinet reiterated a Buy rating with a $170 price target. The firm believes that IBM’s modest sales miss is aggravated by weakness in growth engines cloud and analytics. However, Nomura Instinet sees signs that underlying sales trends remain healthy and gross margins appear sustainably stronger, and IBM is on track for its 2018 EPS and free cash flow (FCF) goals.
Wedbush maintained a Neutral rating with a $185 price target. The firm thinks that more drastic changes are needed at IBM. Its report said:
Maintain NEUTRAL rating post mixed quarterly performance (revenue miss, slightly better than expected CEPS) as the “growth” areas at IBM, namely Strategic Imperatives, Cognitive and Cloud are yet to show growth consistency/acceleration while profitability performance also remains unconvincing (assuming pockets of underperforming hardware/software/services businesses). We continue to believe that only undertaking the difficult path of aggressively terminating/restructuring underperforming units, hence, sacrificing top line growth for generating margin/FCF improvements will likely generate significant return to shareholders. As is, IBM’s portfolio of commoditized, legacy “tech” products and services will continue to cap the performance of the entire operation.
Merrill Lynch reiterated a Buy rating with a $200 price objective. The firm views 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. Ultimately, Merrill Lynch believes that IBM will embark on further cost-cutting and enhance its services and software offerings through acquisitions. Longer term, IBM is expected to take share in IT spending with its cloud and AI initiatives.
Here’s what a few other analysts had to say:
- Morgan Stanley has an Overweight rating with a $168 price target.
- BMO Capital Markets has a Market Perform rating and a $164 target.
- Cantor Fitzgerald has a Neutral rating with a $140 price target.
Shares of IBM were last seen down 6% at $136.00 on Wednesday, with a consensus analyst price target of $163.30 and a 52-week trading range of $133.43 to $171.13.
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Chris Lange is a financial and geopolitical writer with more than a decade of experience covering a myriad of topics. He has published thousands of articles for 24/7 Wall St., with past coverage focused heavily on stocks, IPOs, healthcare, defense, global affairs, and technology.
His work has been quoted, or referenced by a number of outlets including Business Insider, USA Today, Yahoo Finance, MSN, The Motley Fool, and many other publications. A graduate of Southwestern University, he studied business with a focus on investments and has previous experience in banking and startups.
When not reading or writing the news, he is following his passion for Lacrosse, playing chess, or building solar projects with his dad.
