Sarah Roden

About the Author Sarah Roden

Sarah writes about stock market news for TipRanks. She graduated as member of Phi Beta Kappa from the University of Richmond in Richmond, Virginia.

International Business Machines Corp. Feels the Heat from Foreign Exchange Headwinds; Analysts Offer Mixed Ratings (IBM)

International Business Machines Corp. (NYSE:IBM) released first quarter 2015 earnings on April 20. IBM’s earnings pointed to signs that the company is successfully transitioning into a Cloud-based service, though earnings were significantly impacted by a strong U.S. dollar.

IBM reported non-GAAP diluted earnings per share of $2.91, above the analyst consensus of $2.81 and marking a 9% year-over-year increase. Big Blue posted quarterly revenue of $19.6 billion, just shy of analysts’ estimate of $19.7 billion. Revenue decreased 12% year-over-year, but IBM pointed out that it is a flat year-over-year difference when adjusting for currency and divested businesses. Looking forward, IBM expects to post full-year 2015 GAAP diluted earnings per share between $14.17 and $14.92, and non-GAAP diluted earnings per share between $15.75 and $16.50.

This is the eighth report out of nine quarters that IBM has missed the revenue mark, though many investors were pleased with the company’s posted earnings per share. Foreign currency headwinds, as IBM noted in its report, had a sizeable impact on earnings because a substantial amount of IBM’s business is outside the US.

IBM has been transitioning from a traditional hardware business into a Cloud and software based company. Software business has been declining, with revenue down 8% year-over-year to $5.2 billion. However, revenue from strategic imperatives increased 30% year-over-year, with Cloud revenue specifically up 75%. Furthermore, IBM’s business analytics revenue increased 12% year-over-year, but IBM notes it as a 20% year-over-year increase when adjusting for currency and divested businesses. Many analysts are confident that these figures illustrate the success of IBM’s transition to the Cloud, despite IBM being a late-comer to Cloud technology. Martin Schroeter, IBM CFO, commented in a conference call, “We’re transforming our business and seeing signs that our transformation is succeeding.”

IBM’s report triggered a slew of mixed ratings from analysts who were eager to weigh in the stock.

After IBM released earnings, analyst Brian White of Cantor Fitzgerald reiterated a Buy rating on the stock with a price target of $198. White noted IBM’s “healthy” first quarter performance believes “this performance is especially encouraging given a fierce foreign exchange headwind and a volatile macro environment.” White continued, “Given scepticism around this turnaround and continued negative sentiment around IBM, the stock is trading at just 10.0x our CY:16 EPS estimate with an attractive 2.7% dividend yield.”

White has a 70% success rate recommending stocks with a +18.6% average return per recommendation.

Separately, analyst Kulbinder Garcha of Credit Suisse reiterated an Underperform rating on IBM after first quarter earnings with a $125 price target. Garcha is bearish on the stock because he still believes IBM faces “secular and structural challenges.” Consequently, he continued, “guidance could again be challenging to achieve operationally.” Garcha anticipates a “multi-year painful turnaround “for IBM and consequently slightly lowered his 2015 EPS estimate though slightly raised his 2016 EPS estimates. His concern is that “as the mainframe cycle fades the secular issues remaining with Software and Services remain a headwind for the business.”

Garcha has a 51% success rate recommending stocks with a +8.2% average return per recommendation.

Also following the report, analyst Steven Milunovich of UBS reiterated a Neutral rating on IBM but raised his price target from $160 to $170. Milunovich commented, “The stock may be bottoming along with free cash flow, but we consider it too soon to declare victory and remain at Neutral.” The analyst still has several concerns: “(1) CFO Schroeter provided more cash flow detail, including a larger than expected $2bn positive swing from less cash tax hit this year but indications it would be a headwind in 2016; (2) software was down 2%, a slight improvement but reflecting market share loss; (3) GBS revenue was soft due to weakness in the US, and GTS pretax was off by 26% YoY; (4) loss rate and reserve coverage are rising in Global Financing.”

Milunovich has a 56% success rate recommending stocks with a +6.9% average return per rating.

On average, the top analyst consensus for IBM on TipRanks is Hold.

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