IBM Analysts Divided Over Merit Of Q4 Beat, Strong Guidance

IBM IBM reported better-than-expected fourth-quarter results and also issued upbeat earnings forecast for fiscal year 2020. This is a turnaround from the third quarter, when it missed the consensus revenue estimate.

The Analysts

BofA Securities analyst Wamsi Mohan reiterated a Buy rating and $170 price target for the shares.

Morgan Stanley analyst Katy Huberty maintained an Equal-Weight rating and increased the price target from $155 to $164.

Wedbush analyst Moshe Katri maintained a Neutral rating and $155 price target.

Credit Suisse analyst Matthew Cabral maintained an Outperform rating and $173 price target.

BofA Views The Stock Favorably

IBM's revenue beat was built on the back of across-the-broad strength in all segments, and particularly in Red Hat and systems, Mohan said. Despite no tax rate, IP income benefit, the company reported just in line EPS, as revenue upside was offset by weaker margins.

Mohan attributed the strong 2020 EPS guidance to continued Red Hat growth, benefit from Red Hat synergies, cloud Paks and GTS stabilization.

"We view the stock favorably given improving rev and FCF in C2020+, 4.7% div yield and synergies from Red Hat," Mohan wrote in a note.

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Q4 Upside Came From Less Sustainable Factors

IBM's strong results came about from less sustainable factors such as currency and mainframe software, taking some sheen of the fourth-quarter beat, Huberty said. The analyst expects higher investment in go-to-market and innovation to impact 2020 pre-tax income, which however will be offset by a lower tax rate.

"Red Hat remains a bright spot as pro forma growth accelerated for the second quarter in a row to 24% CC," Huberty wrote in a note.

Morgan Stanley raised its 2020 EPS estimates by 53 cents to $13.33, to account for the lower tax rate. That said, the firm's guidance is still modestly below the guidance and the consensus pre-tax income and free cash flow estimates, reflecting downside risk to core IBM growth.

Services Business Performance and Outlook a Sore Spot

Despite the overall revenue beat, Services revenue trailed expectations, with the upside stemming from a one-time gain and the Systems and Global Financing segments, Katri said.

The analyst noted annual bookings metrics remained weak relative to the strength shown by peers, suggesting potential ongoing market share losses. This, according to the analyst, could potentially hinder growth of services businesses in 2020 as well as 2021.

"IBM's financial metrics continue to be negatively impacted by ongoing revenue/pricing cannibalization of legacy software/services as services delivery utilize SMAC-related technologies and as enterprises continue to change the way they buy software," Wedbush wrote in a note.

Sustainability Of Organic Revenue Growth Key For Stock

The fourth-quarter results are a step in the right direction, giving confidence that IBM along with Red Hat brings together the platform, incumbency and expertise to help customers to migrate to hybrid cloud, Cabral said. The analyst is encouraged by "the acceleration of Red Hat and early pull-through of "core" IBM led by RHT-related signings doubling in GBS with 50 new client engagements in the quarter. "

Cabral is of the view sustainability of organic revenue growth will be key for the stock.

IBM Price Action

IBM's traded higher by 4% to $144.70 per share at time of publication.

Photo credit: Mark Ahsmann, via Wikimedia Commons