IBM's Valuation Still Low, JPMorgan Says

In a report published Friday, JPMorgan analysts maintained a Neutral rating on International Business Machines Corp. IBM, with a price target of $170. IBM is scheduled to report its 1Q results on April 20. The analysts expect the company to miss the consensus figure on account of adverse currency effects. The company had indicated earlier this month about 8 percent in adverse FX impact on its 1Q and CY15 revenue growth. The analysts expect steady trend in Services, "driven by potential improvement in GBS (easier comps and applications business could get better), while GTS could face tough comps (low single digit growth)…We expect continued solid uptake in digital offerings, driving high growth in IBM's strategic imperatives (SI) where recent changes to management comp. targets should align sales efforts accordingly." The decline in the Software business could continue on account of ELA changes that had an adverse impact on transaction revenue, the System X sale, and continued weakness in Power Systems. "The stock is inexpensive, however, gaining investor interest trading ~10x NTM estimates or a 40%+ discount to SPX – close to its multi year trough discount which should provide support post 1Q results. Revenue growth trajectory as a key metric this year will likely start slow in 1Q, but the upcoming mainframe refresh (most benefit to flow through in 2Q) and anniversary of various headwinds in 3Q should drive better performance as the year progresses," the analysts said.