Will IBM Hit $195 Before Heading To $260? This Article Explains How

Shares of International Business Machines Corp. IBM could move significantly higher as the company ramps up its efforts in cloud services, big data, mobile, social and cybersecurity software, according to an article by Vito J. Racanelli in Barron's.

Khaner Capital Management’s Lloyd Khaner, who was quoted in the article, felt that IBM would “eventually be a major player in the cloud” as the company’s size and expanding investments would help it catch-up in the marketplace.

IBM had been viewed as a “technology dinosaur” by some analysts, however, the article noted that the company spent $2.2 billion on cloud investments in 2014 and planned over $4 billion in additional investments for 2015.

Another way IBM was shedding its “dinosaur” image was the selling off of poor performing business unites. “Last year, it sold three units that produced $7 billion in sales but lost about $500 million,” Racanelli wrote.

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With improvements in revenue and cuts to poor performers, Khaner thought EPS could come in at $17.88 in 2016 and that if the company began to surprise investors, its P/E could expand to 12x earnings, up from 10x.

The increased earnings from cloud and other services along with a better multiple could mean a stock price of $195 in the intermediate term which could grow to $260 in 2018, according to Khaner.

More Software

With software and services on the rise and hardware sales falling, the report highlighted that hardware sales were still only 11 percent of IBM’s total sales. However, a new server cycle should be starting soon which would include sales of additional software and services. The report noted that IBM’s service revenue backlog was already $128 billion at the end of 2014.

“When sales from big data and analytics, mobile, social, and security software is added to the cloud revenue, the total was $25 billion last year, growing by a healthy 16 percent. Those areas are 27 percent of total sales, double the proportion five years ago. IBM expects these business combined to grow to $40 billion by 2018, or 40 percent of sales,” according to Racanelli.

Earnings Preview

The company reports its Q1 earnings Monday following the market close. The Estimize consensus for was for EPS of $2.94 on revenues of $19.982 billion. The Wall Street consensus was for EPS of $2.89 on revenues of $19.839 billion.

Heading into its earnings release, IBM traded at $163.96, up 2.05 percent.

Posted In: NewsBarron'sMediaKhaner Capital ManagementLloyd KhanerVito J. Racanelli
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