Why IBM Needs Growth To Turnaround

• Shares of International Business Machines Corp. IBM have declined 12.32 percent in the last three months, from a high of $173.22 on July 20.
• Cantor Fitzgerald’s Joseph Foresi has initiated coverage of the company with a Hold rating and price target of $148.
• Foresi believes that the stock could have 1 percent downside, and that the company would need to stabilize its core business and return to growth for the stock to see upside.

According to the Cantor Fitzgerald report, “Investors are getting closer to the bottom with each passing quarter, but the timing of reaching the bottom remains uncertain as the core business continues to decline.”

Analyst Joseph Foresi added that the lackluster software results were working to reduce optimism regarding IBM’s 4Q15 performance.

On the other hand, revenues of the Strategic Imperative division have been growing “at an impressive rate,” increasing over 30 percent year on year in 2Q. The legacy business, however, has continued to struggle.

Foresi believes that overall year on year growth would be unlikely for the company till 2016, although margins have “held up well” despite Fx headwinds and IBM’s aggressive investments in growth.

“As IBM divests nonperforming businesses and returns to growth, the stock should perform well, in our view, as business turnarounds commonly drive higher valuation,” Foresi added, while mentioning that the company had “significant competitive advantages built over many years.”