International Business Machines Corp. (NYSE: IBM) still offers a serious conundrum for investors. It looks dirt cheap on the surface, one of the cheapest DJIA stocks, but the problem is that the financial engineering is masking a truly dismal scenario for IBM under CEO Ginny Rometty’s plan.

Now a new report from Credit Suisse’s Kulbinder Garcha maintains a strong Underperform rating in IBM shares. The analyst report is on the heels of IBM announcing the z13 mainframe, which is targeting mobility, security and analytics.

Why this report matters is that Garcha is the most bearish of all Wall Street analysts, in this case. His $125 price target is the lowest and is more than $40 lower than the consensus analyst price target for IBM of $166.10.

IBM may have been featured in our world’s most innovative companies list due to its patent awards, but the 24/7 Wall St. 2015 bullish and bearish IBM review highlights many of the valuation trap risks as well. Also, we rated IBM as currently the worst run of the big cap stocks.

An updated pre-earnings report is looking at a continuation of subdued services and software growth. Garcha expects that IBM will report fourth-quarter numbers of $24.6 billion in revenues and $5.37 in earnings per share. Consensus estimates are $24.9 billion in revenue and $5.45 in earnings per share. For the full year, Garcha expects IBM to report sales of $94 billion on earnings per share of $16.16.

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Garcha’s report said:

We see in aggregate of about 2% currency headwind building for IBM on a go forward basis. Beyond this, we continue to believe that IBM faces a painful multi-year process which leads to a prolonged period of underperformance and we reiterate our Underperform rating and price target of $125. Fiscal 2015 and 2016 Street estimates may be 10% and 25% too high.

Garcha currently projects fiscal 2015 earnings of $15.24 per share and in 2016 at $14.42 per share. These are 9% and 20% below the consensus and estimates of $16.69 in 2015 and $17.99 per share in 2016. As a reminder, Rometty finally confessed in October that the goal of $20 in earnings per share by the end of 2015 was going to be unattainable — even with the endless stock buybacks and cost-cutting goals.

The Credit Suisse report further notes that IBM is facing fundamental headwinds in both its Software and Services businesses, with a global decline in total contract value and increasing competition hurting its key business segments. The 2% or so currency headwinds likely will build into 2015, according to the research report, and when taken together with declining share buybacks suggest that Wall Street’s estimates are materially too optimistic.

Even with a forthcoming mainframe cycle, Garcha remains concerned that the fundamental headwinds facing IBM are challenging. Four additional concerns remain:

1) post a new deep dive on Services we see a weak order book and shrinking industry-wide deal sizes causing revenue headwinds and margin pressures;

2) following a thorough analysis of their cloud, it may ultimately be margin dilutive for IBM even if the company drives revenue;

3) restructuring becoming less effective;

and 4) prior concerns over the significant rate of organic decline remain, despite a mainframe cycle, and even this could be optimistic.

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Garcha’s view on IBM’s mainframe business is that the new systems can process 2.5 billion transactions per day. This matters because this figure is equal to that of 100 Cyber Mondays. It can encrypt volume mobile transactions and provide real-time analytics 17 times faster than competitive systems at a greater value. The report said:

Combined with IBM’s MobileFirst solutions, enterprises can deliver better performing and secure mobile apps with end-to-end infrastructure management. Along with SPSS analytics, the new mainframe will support Hadoop and integrate with hybrid cloud, with the ability to run up to 8,000 virtual servers and deliver low TCO. IBM Global Financing will support the launch with payment deferrals. While the release will provide a cyclical respite, the market will continue to contract and this is factored in our numbers.

On that forward price-to-earnings (P/E) ratio looking so cheap, Garcha believes that IBM is not cheap on a free cash flow basis. This is also how Garcha evaluates all IT hardware stocks. His expectation is that IBM’s enterprise value should be valued at 10 times free cash flow rather than 13 times.

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IBM shares were not radically moving on the fresh research report. After 90 minutes of trading on Thursday, IBM shares were up four cents at $155.84, against a 52-week trading range of $150.50 to $199.21. The Thomson Reuters consensus price target of $166.10 is over $41 higher than Garcha’s $125 target for Credit Suisse, but the highest analyst price target is still all the way up at $198.

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