International Business Machines Corp. (NYSE: IBM) is developing a history of disappointing its investors with just about each and every earnings report. This time it is guidance for 2016 being lowered, and investors have to seriously start expecting that CEO Ginni Rometty’s job may be on the line.

24/7 Wall St. has noticed how analysts keep going ever lower on their price targets and views of IBM. It used to be, a long time ago, that IBM was rising and some analysts thought it could rise well over $200. Now we have seen the two most negative analysts with $125.00 price targets go even lower — to $110.00. This is even making the newer bearish case for DJIA 14,961 look less and less ludicrous.

There is a slight difference here in the negativity on IBM. Jefferies made its cut to $110.00 ahead of earnings. Credit Suisse, which had been the most pessimistic all the way down, lowered its target to $110.00 on Wednesday morning.

If there is one shareholder who is squirming about the prospects for IBM, it is Warren Buffett. This position has kept pounding the unrealized losses for Berkshire Hathaway Inc. (NYSE: BRK-A). Buffett generally was against being a big technology stock investor, and maybe he should have stayed that way. Buffett’s unrealized losses were $2 billion at the end of September, and IBM shares were trading at $143.62 on the last day of September. IBM is starting to make its 2016 bullish and bearish outlook seem like a fairy tale.

Jefferies had made its lower cuts on Tuesday, noting that IBM and peers needed to be lower due to currency, but also said that IBM’s software segment expectations were too high. Jefferies trimmed its 2017 IBM earnings per share (EPS) estimate by 4.5%, with 2% due to currency and the rest due to greater pessimism around IBM’s software prospects.

The firm’s post-earnings analysis took EPS for 2016 down to $13.50 (from $14.65) and saw the 2017 EPS estimate down to $13.75 from $15.20. Jefferies analyst James Kisner reiterated his Underperform rating and said:

Adjusting for taxes, Q4 EPS missed Consensus. As we expected, CY16 EPS and FCF guidance was disappointing driven by currency and ongoing weakness in Software. We believe IBM faces a tough transition as enterprises increasingly allocate investments away from traditional Software and IT Services and toward as-a-service/cloud.

Credit Suisse is the one firm that 24/7 Wall St. has credited for quite some time as being the most negative (and therefore the most accurate) around IBM. The firm’s analyst behind the negativity was Kulbinder Garcha, who dropped his target to $110.00. The summary was a reset for 2016 expectations for another down year.

Garcha also noted that IBM earnings were actually helped by a lower tax rate of only 14.6%. Mixed earnings may be one thing, but his big concern is the continued disappointment in software and that the secular and structural challenges facing IBM remain in place with only limited improvement in services and software margins. Software, with and without currency adjustments, was said to be worse than Credit Suisse feared and the trend seems to be accelerating.

Credit Suisse cut the 2016 EPS target by 6% to $13.13 and introduced a 2017 EPS target of just $13.16. As you have seen from Credit Suisse before, the warning is dire with more risks to the downside: “We see a painful multi-year turnaround ahead.”

Garcha reiterated his Underperform rating. The valuation of $110 is based on a free cash flow estimate of $10.5 billion and is at 12.4 times its enterprise value versus free cash flow.

IBM opened down closer to $118.50 and it now has a new multiyear low of $118.00 (versus a $176.30 52-week high). IBM’s shares were last seen down 4.4% at $122.31, and the 5.1 million share daily average volume was already blown out with well over 7 million shares traded in less than 90 minutes of trading.
[ims_survey]
What hurts so bad for investors like Buffett is that IBM’s risk remains to the downside. Buffett may keep buying IBM stock, but he is just averaging down and the losses are becoming rather large. Buffett’s latest quarterly filing said of IBM:

Unrealized losses at September 30, 2015 included approximately $2.0 billion related to our investment in IBM common stock, which represented 15% of our cost. IBM continues to be profitable and generate significant cash flows. We currently have no intention of disposing of our investment in IBM common stock. We expect that the fair value of our investment in IBM common stock will recover and ultimately exceed our cost.

IBM is a very hard case for Berkshire Hathaway and Buffett alike. He tells investors to buy when others are fearful, but IBM’s drop is far above and beyond just what economic risks are out there. Buffett has to consider what declining fundamentals of company being worse than declining economic fundamentals might look like.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.