IBM's Earnings Leave BMO Analysts With 'Mixed Views'

BMO said it's having "mixed views" on the quarterly results of International Business Machines Corp. IBM while maintaining its Market Perform rating on the stock.

"Given the slowdown in strategic imperatives and steady decline in core, we believe that revenue growth will take some time, excluding M&A. However, we believe that system revenue declines will be less severe in 2017, given easy compares and a likely mainframe cycle," analyst Keith Bachman wrote in a note.

Revenue growth in the June quarter with acquisitions declined by about 2.6 percent and about 4.6 percent excluding M&A. Further, profit before tax fell 24 percent in the quarter.

IBM reported second quarter revenue of $20.2 billion, versus Street view of $20.1 billion. Non-GAAP EPS of $2.95 were above consensus estimate of $2.89.

Bachman estimates that "core" IBM accounted for 59 percent of revenues and declined 12 to 13 percent, whereas strategic imperatives represented 41 percent of revenues and grew by 12 percent.

However, against ongoing weakness in revenue, IBM reiterated 2016 EPS guidance of at least $13.50 (versus the Street at $13.50), and FCF guidance at the high end of the $11 billion - $12 billion range.

Bachman maintained his FY16 EPS estimate of $13.50, which requires meaningful growth in EPS in the fourth quarter of 54 percent q/q compared to 45 percent q/q in the same period last year. Further, the analyst raised his CY16 GAAP FCF forecast to $13.4 billion from $12.8 billion.

For CY17, the analyst cut his EPS estimate to $14.05 from $14.22, but increased his FCF estimate to $13.2 billion from previous FCF estimate of $12.9 billion.

In addition, the analyst raised his price target on the stock by $10 to $165, given the potential for operating income growth in CY17.

In terms of turn-around stories for legacy tech companies, Bachman prefers Oracle Corporation ORCL.