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IBM Stock Slides as Analysts Find Trouble ‘Under the Hood’IBM Stock Slides as Analysts Find Trouble 'Under the Hood' in Q3 EarningsSavitz, Eric J.Barron's (Online); New York IBM shares are coming under pressure following the enterprise computing giant's September-quarter earnings report . On the surface, that's a little surprising. The company's results were right in line with its pre-announcement of results last week, when it unveiled plans to spin off its $19 billion managed-infrastructure services business. But as multiple analysts noted this morning, there was trouble beneath the surface, with the company continuing to struggle with both a global economic slowdown and shifting enterprise IT spending patterns. For the quarter, IBM (ticker: IBM) reported revenue of $17.6 billion, down 2.6% from a year earlier, off 3.1% if you adjust for currency and divested businesses. Non-GAAP profits were $2.58 a share. That's exactly what the company had pre-announced on Oct. 8. IBM declined to give any financial guidance, which, while perhaps disappointing to some, was no surprise. And the company gave scant new details on the planned spinoff—we still don't know what it will be called, who will run it, or how the income statements and balance sheets of the two parts will line up afterward. Morgan Stanley analyst Katy Huberty says that the results were "weaker under the hood." She writes in a research note that profits in the quarter were weaker than expected when adjusted for currency and tax rates, and she adds that free cash flow also disappointed. "We continue to view IBM as a 2022 stock," she writes. "IBM typically underperforms our IT hardware coverage when IT demand recovers given a high mix of recurring revenue and that dynamic is playing out near-term." Hubertry says that a 20% decline in mainframe revenue was a negative surprise, with the company asserting that some customers had pulled forward orders into the first half, while others (particularly in the travel sector) have delayed purchases due to the downturn. She also says that software and services revenue were hurt by customer push-outs of large perpetual licensing deals. And services segments have seen project delays tied to the economic slowdown. Still, Huberty maintains her Equal Weight rating and $140 price target. Citi's Jim Suva likewise maintains a Neutral rating and $140 target. He writes in a research note that the IBM story is getting increasingly complex and hard to model, pointing to the lack of guidance, the pending spinoff, and expected charges of $2.3 billion in the fourth quarter and $2.5 billion next year for various restructuring moves not yet detailed. "We believe consensus Q4 EPS and cash flow [estimates] will move lower and there is risk that the seasonal Q4 budget spend may not materialize to the full extent as it has in the past," Suva notes. BMO Capital's Keith Bachman writes in a research note that IBM has been taking the right steps to create shareholder value with the Red Hat acquisition and the planned spinoff. But he also says that "underlying business trends remain weak...patience will be required." And he adds that IBM will have limited capital to do additional acquisitions at least until 2022. Seeing "no near-term catalysts," he maintains a Market Perform rating with a $138 target price. Wedbush analyst Moshe Katri writes that IBM's results continue to be impacted by a "large legacy-revenue base...which is undergoing a gradual cannibalization from new delivery models," including cloud computing, software-as-a-service, and automation, only partially offset by faster growing parts of the business. "The net result continues to be lackluster revenue growth and inconsistent margin performance. We don't believe these dynamics will change post-planned spin-off," he writes. Kartri keeps his Neutral rating and $140 target price. IBM shares were down 6.6%, at $117.26, in recent trading. The S&P 500 was up 0.4%. |
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