Watch Out For A Pullback In IBM

International Business Machines Corp. IBM is scheduled to report its 1Q results on April 18.

Goldman Sachs’ James Schneider maintained a Neutral rating on the company, while raising the price target from $135 to $138.

1Q Expectations

“Given the sustained business challenges IBM is experiencing and weaker near-term discretionary IT services spending, we expect little change in IBM’s underlying business momentum post a weak 4Q report,” Schneider mentioned.

Although the analyst believes that the 1Q EPS might beat the consensus expectations, revenue is likely to be in line with or below consensus.

Schneider expects the software and legacy services to continue to pressure performance for IBM.

Stock Could Trade Down

“We expect the stock to trade down post the quarter given our expectation of a tepid revenue quarter and in light of the recent rally,” Schneider cautioned.

IBM has significantly outperformed over the past few months, appreciating 27 percent from the year to date lows, which the analyst believes was unwarranted, given the continuing fundamental headwinds.

The analyst also noted that although the company’s Strategic Imperatives grew 26 percent in 2015, this growth decelerated in 4Q15 to 16 percent, which indicates that growth could remain pressured in 1H16.

“However, we would point out that FX trends have moderated substantially in 1Q – and we currently model in impact of just ~70bps in 2016 (from 260bps previously),” Schneider said.

The EPS estimates for 2016, 2017 and 2018 have been raised due to favorable FX.