Oppenheimer: IBM 'Turning A Corner, Slowly'

Oppenheimer said International Business Machines Corp. IBM is "turning a corner, slowly" as it initiated coverage of the stock with a Perform rating.

The brokerage said IBM has refocused its business on key initiatives to return to consistent revenue and FCF growth after several years of decline. IBM's SI focuses on analytics, cloud, mobile, security, and social, through both organic as well as acquisitions.

"Based on our analysis, we believe IBM could stabilize revenue in 2016 and drive marginal growth (0%-2%) in 2017 and beyond, as its transformation takes hold," analyst Ittai Kidron wrote in a note.

The analyst sees SI revenue growth at a 7.6-11.5 percent CAGR through 2019 (reaching $38.9 billion-$44.8 billion in 2019), driven by growth in cognitive and predictive analytics (4-8 percent), and in cloud (14-20 percent). Kidron expects if IBM is able to grow the SI revenue at the estimated rate, it would account for 52 percent of IBM's total revenue.

For context, growth in SI revenue stood at a 16.7 percent CAGR (2012-2015), making for revenue of $29.0 billion in 2015 (about 36 percent of IBM's total revenue), up from $18.3 billion in 2012 (about 18 percent of IBM's total revenue).

The analyst believes IBM has potential to deliver significant EPS upside on consistent execution, and noted that one percentage point increase in revenue growth or operating margin can boost EPS by 4-5 percent.

To become more constructive on the stock, Kidron says SI should get closer to 50 percent of revenue, an event that would propel IBM to deliver more consistent upside and see multiple expansion.

"While we have a positive bias, we believe IBM is not far enough along in its transformation to deliver upside on a consistent basis, a needed element for multiple expansion. This leads to our neutral view," Kidron added.