Organic Growth Is What's Missing From The IBM Story At This Point

Sherri Scribner of Deutsche Bank is concerned with International Business Machines Corp. IBM’s lack of organic growth and falling margins.

Scribner maintained her Hold rating despite IBM’s third quarter beat.

IBM’s third quarter sales of $19.2 billion and EPS of $3.29 came in modestly above Street expectations of $19.0 billion and $3.23. IBM also reiterated its full-year FY-16 EPS guidance of at least $13.50 and reiterated FCF guidance at the high end of its target range of $11-$12 billion in FY 2016.

“With limited visibility on a return to sales growth or a turn in downward margins trends, we see risk/reward as balanced,” Scribner wrote in a note.

Related Link: Where Was The Bright Spot In IBM's Earnings?

Strategic Imperatives grew 15 percent year-over-year, with growth coming from both the Analytics and Cloud segments. However, gross margins continue to drop from last year with Cognitive margins down 4ppts year-over-year, with other segments too reporting year-over-year declines.

“Below the operating line, higher IP income helped EPS by roughly $0.14 after taxes, while a lower tax rate also added $0.14 in the Q, suggesting EPS would have been $0.28 lower excluding these items,” Scribner added.

The analyst maintained her 2016/2017 EPS estimate of $13.50/$12.95 and price target of $145.

At time of writing, shares of IBM fell 2.71 percent to $150.58.