Why IBM’s Turnaround Can Shine, If Forex Headwinds Abate

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International Business Machines Corp. (NYSE: IBM) ranks as one of the three best-performing Dow Jones industrial average stocks so far in 2019, and it seems the bulls are calling for this stock to rise even higher. With its acquisition of Red Hat closing later this year, Big Blue is picking up steam at least according to one analyst.

Nomura reiterated a Buy rating for IBM with a $160 price target, implying an upside of 11.6% from the most recent closing price of $143.39.

The brokerage firm believes that organic improvement in cloud and artificial intelligence (AI) plus inorganic transformation puts IBM in an incredible position for a return to sustained sales growth. Ultimately this is mixed, where on one hand Nomura is modeling 2% in organic growth in the fourth quarter, while on the other foreign exchange (FX) has worsened.

Nomura estimates cloud as a service sales will grow about 20%. IBM is winning new, even cloud native, customers before the Red Hat acquisition. A modest though respectable 15% of respondents in Nomura’s CIO survey use the IBM Cloud. OpenShift should help IBM win new customers and new workloads as enterprises begin to usher mission critical applications from on-premise to public or private clouds.

Also Nomura expects “Watson on AWS/Azure/GCP” courtesy of OpenShift to broaden its total addressable market. This plus new leadership should help Watson news flow to recover from an (overstated) low last summer. More than 30% of respondents in the CIO survey already use Watson.

In the report, the firm detailed:

We believe FX headwinds should be at least at the high-end of IBM’s 1-2 point guidance. We lower our 2019 estimates from $78.0 billion / $13.95 to $77.2 billion / $13.90. Consensus of $78.0 billion / $13.91 does not appear to encompass FX headwinds. Our $160 target price is 11.3x our 2020E EPS of $14.17. We believe IBM’s return to growth merits a premium to its five-year average of 10x, though the pricey Red Hat deal should cap multiple expansion.

Excluding Tuesday’s move, IBM had outperformed the broad markets, with its stock up about 26% year to date. However, over the past 52 weeks, the stock was actually down closer to 5%.

Shares of IBM were last seen down 1% at $142.29, in a 52-week range of $105.94 to $162.00. The consensus price target is $141.06.


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