IBM Turnaround? Credit Suisse Gives 5 Reasons It Is Not Happening

Credit Suisse’s Kulbinder Garcha believes that despite the robust move in International Business Machines Corp. IBM's share price, there appears to be little evidence of an inflection at IBM.

Garcha reiterated an Underperform rating on the company, with a price target of $110.

Some Concerns

The analyst expressed concern regarding the margin pressure evident across IBM, which could lead to the free cash flow being revised down to as low as $10 billion over time. Furthermore, Garcha cautioned there could be accelerating declines on an organic basis.

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“We find compelling evidence that IBM has yet to see an inflection in fundamentals. In fact, we see the business is deteriorating given several factors,” Garcha mentioned.

5 Reasons

The analyst highlighted five reasons that pointed to a deteriorating situation:

1. Revenue declines were organically accelerating, having declined 5 percent in 2016 as compared to declines of 1.8 percent and 1.2 percent in 2014 and 2015, respectively.
2. “We note that revenue trends are worsening in six of 11 reporting segments, suggesting a broad based weakness,” the Garcha said.
3. The analyst believes investors should look toward the underlying PTI trends, ex-gains and restructuring, with the 1H16 estimates expected to be down 26 percent year-on-year, which is also an accelerated decline.
4. Signings declined 17 percent year-on-year in 1Q, while book-to-bill stood at 0.96x, below the 1x seen in the past eight quarters.
5. “In software and service, we see continuous market share loss, suggesting a loss of scale and competitive advantage,” the analyst added.

Garcha also believes the continued share loss implies some relative shrinkage of scale, along with loss of competitiveness for IBM.

At time of writing, IBM was up 0.63 percent at $153.89.