Stifel Cuts Target On IBM $20, Believes Lowered Outlook Signals 'Weak' Q3 Exit Rate

• International Business Machines Corp. IBM shares are down 12 percent year-to-date, having plummeted from above $170 on July 20 to below $141 on August 25.
• Stifel’s David Grossman maintained a Buy rating on the company, while reducing the price target from $180 to $160.
• The company’s 3Q results indicate weaker-than-expected software conversion rates, Grossman mentioned.

IBM reported its 3Q revenue at $19.3bn, representing a 1 percent y/y decline and missing consensus expectations. The company’s EPS, at $3.34, was marginally higher than expected, albeit due to a lower tax rate adding $0.08 per share.

Analyst David Grossman commented, “Notable items for the quarter included weaker than expected results in its more “transactional businesses,” particularly in the US.”

IBM’s software conversion rates exiting 3Q were weaker than expected, even though the decline in revenue continued to be at 3 percent y/y

The company reduced its EPS guidance for 2015 from $15.75-$16.50 to $14.75-$15.75. This represents a reduction in growth from flat-to-down 5 percent to (down 5-11 percent. IBM also reduced its FCF guidance from modestly up y/y to flattish.

Grossman said, “The revision to guidance reflects the diminished 3Q exit rates for software and services as 4Q is IBM’s seasonally strongest transactional quarter.”

In the report Stifel noted that many factors had an impact on the guidance, including “currency, emerging markets, deflation in the legacy base and slowing US growth.”

Grossman added, however, that it was unclear “whether the significant downward revision to guidance reflects an attempt to reset the bar for next year, including a margins that should facilitate ongoing investment in the faster growing strategic growth initiatives.”

The EPS estimates for 2015 and 2016 have been reduced from $15.71 to $14.75 and from $16.36 to $15.30, respectively. “It will be difficult to grow FCF in 2016 on this EPS base, which suggests the stock could remain in a trading range of high $135-$145, pending the 4Q report.”