Stepping Back From IBM's Weak Quarter, 'Big Blue' Is Still An Attractive Risk-Reward

Shares of International Business Machines Corp. IBM were trading lower by more than 5 percent after the company's first quarter earnings report. Investors shouldn't be unfazed by the selloff, at least according to JMP Securities' Greg McDowell.

McDowell maintained a Market Outperform rating and $188 price target on IBM's stock. The analyst highlighted several positive aspects of the report, including the company's reiteration of its goal to achieve an operating (non-GAAP) earnings per share of at least $13.80, and its full-year free cash flow guidance.

IBM also stated it's "ahead of track" to grow its Strategic Imperatives revenue to $40 billion next year, which implies a mix-shift to over 50 percent of revenue.

Take A Step Back

The analyst did note IBM's weakness in:

• UK and Germany which was down 4 percent year-over-year
• Systems fell short of expectations
• Technology Services and Cloud Platforms expectations
• Gross margins and pre-tax margins came in below consensus estimates due to incremental investments and a shift to "as-a-service" revenue

However, McDowell believes investors should be "stepping back" from the quarter and consider the stock's attractive valuation and 3.5 percent dividend yield. Shares of IBM are trading at a P/E multiple of just 11x on 2018 which is a discount to the analyst's price target which implies a 2018 P/E multiple of 13x, which is roughly in line with its peers.

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