What Analysts Are Saying About IBM's Outlook

Shares of International Business Machines Corp. IBM fell more than 6 percent despite reporting better-than-expected results. Investors aren't impressed with the company reporting revenue drop for the 16th straight quarter, hurt by customer migration to cloud services.

"A bevy of one-time items and acquired revenue were not enough to drive a major EPS beat, which we think investors had been expecting even if it was low-quality," Barclays' Mark Moskowitz wrote in a note.

In addition, the margin pressure continues to haunt IBM. The company reported gross margin of 46.5 percent, lower than last year's 48.2 percent. Moreover, IBM's commentary suggests the margin pressure to continue given heavy investments and the company needs to do more cost cutting.

Moskowitz, who has an Underweight rating on IBM, said first quarter results don't indicate a major improvement in fundamentals. However, the analyst maintained his $125 price target.

Related Link: Brian White Hikes IBM Revenue Forecast, Ups Target To $166

Noting that the margin struggle is the bigger picture, the analyst stated "the incremental struggle remains that soft margin trends require more cost take-outs, implying that IBM's revenue growth priorities might carry below-corporate margins."

Kulbinder Garcha of Credit Suisse criticized the business management tactics of IBM, saying it's "unsustainable" and sees only limited improvement in Services and Software margins. Garcha reiterated Underperform rating and a $110 target price.

Citigroup too said it would like to see improvements in margins and organic sales growth, while reiterating its Neutral rating on the stock, with $140 target price.

Goldman Sachs said IBM's 2016 EPS outlook of $13.50 is below the firms' estimate of $13.80. The brokerage, which maintained its Neutral rating and $138 price target on the stock, believes the workforce rebalancing and one-time tax benefits "largely offset each other."

JPMorgan remains Neutral rated and raised price target to $159 from $134 with a patient view on revenue recovery. On a positive note, analyst Tien-tsin Huang said the company's full year outlook could prove conservative amid weaker USD and if transactional revenue holds up.

However, Morgan Stanley stuck to its Overweight rating and $168 price target on the stock saying improvement in free cash flow and software and GBS businesses are signs that the company is bearing the fruits of transformation. Analyst Katy Huberty noted Q2 guide-down not a major concern.

"We continue to see shares re-rating toward software/services peers as IBM returns to EPS/FCF growth in 2017," Huberty added.

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