Technology

Why Analysts Are Cautiously Positive on IBM After Earnings

Chris Lange

Published: April 21, 2020 1:07 pm

For the most part, analysts seemed to be sidelined on International Business Machines Corp. (NYSE: IBM) after it released its first-quarter financial results after the markets closed on Monday. However, there seems to be a fair amount of cautious positivity in the calls.

24/7 Wall St. has included some highlights from the earnings report, as well as what analysts are saying after the fact.

For the first quarter, Big Blue posted a 3.4% drop in revenues to $17.6 billion. The company did claim that the revenue drop was actually a gain of 0.1%, if it adjusted for divested operations and for currency. The company’s earnings from operations came to $1.84 per share.

Refinitiv had consensus estimates of $1.79 in earnings per share and $17.72 billion in revenues. While the earnings report was above expectations, a return to declining revenues only spells that much trouble for IBM.

Revenue for the Cloud & Cognitive Software segment was up 5%, or up 7% adjusted for currency. Its Systems revenues were up by 3%, or up 4% if adjusted currency. IBM’s Global Business Services saw flat revenues from a year ago, but that was still up 1% after adjusting for currency.

IBM further reported that its total cloud revenue rose 19% to $5.4 billion, but that would be up 23% if adjusted for divested businesses and for currency. The company’s revenues from its 2019 acquisition of Red Hat were up 18%, which would have been up 20% if adjusting for currency.

While IBM did post improvements in operating margin and net margin, the company also said it was withdrawing full-year 2020 guidance in light of the COVID-19 impact on the economy.

IBM generated net cash from operating activities of $4.5 billion in its first quarter, but that would have been $2.1 billion excluding Global Financing receivables. The company’s free cash flow was $1.4 billion, and it returned $1.4 billion to shareholders via dividends. IBM showed its liquidity position at the end of the first quarter as $12.0 billion in cash, while its total debt of $64.3 billion, including $22.3 billion in Global Financing debt, was down $8.7 billion since the end of the second-quarter 2019.

Credit Suisse reiterated a Buy rating with a $150 price target. The firm had this to say on IBM:

We remain firm that IBM + Red Hat is significantly better positioned for the shift toward hybrid, and like the balanced focus on investment (rather than just NT profitability) which should allow the company to emerge stronger post-COVID with the potential for sustained, revenue driven EPS growth ahead. Using our detailed framework that blends transactional vs. recurring sales and fixed vs. variable costs, we adj. our CY20/21/22 EPS.

Nomura weighed in on IBM as well:

Business in IBM’s software units slowed meaningfully in March as expected. IBM offset this in 1Q, though implied this would challenge 2Q and beyond. We reduce our already lowered estimates modestly and retain our $135 target. In a welcome shift, new IBM CEO Arvind Krishna plans to be a permanent fixture on the call.

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Here’s what some of the other analysts were saying:

• Wedbush Securities reiterated its Neutral rating but cut its price target to $140 from $155.
• Wells Fargo reiterated an Equal Weight rating and cut its price target to $120 from $145.
• Stifel reiterated a Buy rating and lowered its price target to $147 from $169.
• Morgan Stanley reiterated an Equal Weight rating and raised its target to $111 from $107.
• Merrill Lynch reiterated a Buy rating with a $145 price objective.

IBM stock traded down about 4% Tuesday to $115.22, in a 52-week range of $90.56 to $158.75. The consensus price target is $131.24.