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Wells Fargo Believes IBM Is A 'Fairly Defensive Stock'

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Analyst Maynard Um at Wells Fargo on Thursday, April 17, 2014, released a report International Business Machines (NYSE: IBM).

Shares of the company are down $6.55 or 3.34 percent to 189.76, the company missed analyst' expectations or earnings and revenues in the first quarter and reported earnings Wednesday. The firm has rated IBM as Market Perform and Market Weight, meaning that the stock appears appropriately valued and is expected to perform in-line with the relevant broad market benchmark over the next 12 months.

Maynard Um, Senior Analyst at Wells Fargo led the research and the firm has cited a valuation range of 175 to 185, the analyst commented, “We have a valuation range of $175-185 for IBM stock based on about 10x our 2014 EPS estimate of $17.81. We see upside potential if IBM continues to generate higher EPS growth. We believe negative risks include the potential impact from a weaker economy and execution risks.”

The analyst continued to talk about IBM being a “fairly defensive stock” in its opinion given IBM's historical track record of meeting and exceeding guidance, return of solid cash flow in the form of share repurchases and dividends, and recurring revenue streams. However, the analyst continued that because of its premium valuation relative to its peers and inline with S&P 500 this limits potential for an increase in price relative to the overall market.

IBM reported revenues of 22.5 billion, which were in line with Wells Fargo's estimates, but were below Street estimates.

Wells Fargo cited these following reasons for being good:

  • The service segment saw yr/yr margin expansion excluding the impact of one-time items.
  • IBM continues to have the ability to drive EPS despite demand pressures.
  • IBM has newer targeted areas of mobility, cloud and security and continues to see good growth.
  • The software segment is seeing good growth, in particular, Websphere (up 12% yr/yr).

In addition the firm cited these as being bad:

  • Q1 CF was soft and we believe IBM's target to increase FY2014 FCF by $1B now appears somewhat challenging,
  • A lower tax rate of 20% vs. 23% did not yield a FY2014 EPS guide increase,
  • Significant declines across hardware products and these are expected to remain soft (mainframe is six qtrs into its product cycle, Power expected to remain challenging, x86 will likely remain pressured given pending sale to Lenovo and storage is also expected to be soft),
  • Services signings were soft ($11.2B vs. our below consensus $13B),
  • China remains weak, revenue down 20% yr/yr (third straight qtr of 20%+ decline),
  • IBM is facing pricing pressure in services.
  • IBM growth markets continue to see slow growth.

Latest Ratings for IBM

DateFirmActionFromTo
Oct 2014BarclaysMaintainsEqual-weight
Oct 2014Citigroup
Oct 2014Credit SuisseMaintainsUnderperform

View More Analyst Ratings for IBM
View the Latest Analyst Ratings

Posted-In: Maynard Um Wells FargoAnalyst Color Reiteration Analyst Ratings

 

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