IBM's Profitability Remains A Concern Following Mixed Q1 Results

Sherri Scribner of Deutsche Bank maintained a Hold rating on International Business Machines Corp. IBM's stock with an unchanged $150 price target after the company's first quarter report failed to impress the Street.

Scribner said IBM's earnings report signaled that benefits from acquisitions are "waning" while sales declines have accelerated. Moreover, profitability remains a concern as gross margins dipped 300 basis points year-over-year, while any inflection point for sales is years away.

There Are Some Positives

Scribner pointed out that there are some positives to be seen in the earnings report. Specifically, sales from Strategic Imperatives grew at a low double-digit rate and made up 42 percent of IBM's sales over the past 12 months. Cognitive Solutions also showed its fourth straight quarter of sales growth.

Sales from the cloud grew 35 percent year-over-year, while sales from cloud as-a-Service sales rose 61 percent and reached an annualized run rate of $8.6 billion.

Scribner argued that while bulls will cling to these improving metrics, the fact remains IBM is a business whose core products continue to deteriorate. Also important to keep in mind, IBM's earnings per share beat was in part helped by a tax benefit and a higher-than-expected IP income.

Bottom line, Scribner believes the 4 percent decline in IBM's stock after its earnings report implies the current risk to reward profile is "balanced."

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