IBM Gets Ready to Rumble with 1Q18 Results; Top Analyst Weighs In

RBC's Amit Daryanani is encouraged to see "multiple" tailwinds in the foreground that he bets will strengthen IBM's gross margins this year.


IBM (NYSE:IBM) has good odds to show a one-two punch of organic growth and gross margin expansion in the first half of the year, wagers top analyst Amit Daryanani at RBC Capital in a bullish first quarter earnings preview. As the tech giant gears up to deliver its quarterly print, Daryanani sees chances for modest upside potential on revenue and EPS- as well as prospective upside waiting in the wings for the back half of 2018.

As such, the analyst reiterates an Outperform rating on IBM stock with a $180 price target, which implies a 13% upside from current levels.

For the first quarter of 2018, the analyst forecasts $18.7 billion in revenue from the giant along with $2.41 in EPS, aligning with the Street’s expectations. Various tailwinds lie ahead that could boost gross margins that much higher, adds the analyst, including initiatives circling services productivity.

Daryanani anticipates, “Given an improved IT spend backdrop combined with favorable f/x environment, we think IBM should report slight upside to both revenue and EPS results vs. consensus. We see high probability gross margins are up (not just ‘stable’) in H1:18, which should enable IBM to work higher from current levels. We do think that IBM may leave their CY18 EPS target unchanged during the print to maintain a relatively easy bar for themselves for the remainder of the year. We anticipate sizable discrete tax-benefit this quarter, which should be largely offset by cost optimization charges.”

For investors, the analyst believes the spotlight will be on strategic imperatives, discrete tax benefits, gross margin and free cash flow performance, prospective impacts from trade wars with China, and budding growth prospects between Watson/artificial intelligence and the Blockchain. On a bullish note, the analyst is “confident” IBM’s gross margins are poised to “stabilize” this year.

This tech giant continues in good standing to exhibit organic growth in the first half of the year, which Daryanani notes is due to “reflecting better underlying trends in services and mainframe cycle (we see potential upside in H2:18).” Additionally, “Mainframe revenues have potential to be more ‘secular’ vs. cyclical given expansion of both workloads and customer additions,” writes the analyst. Even though the company is angling for a discrete tax benefit, that does not mean IBM is “quantifying it,” with Daryanani forecasting a benefit of $1.0 billion in the first quarter- even if the analyst calculates $600 to $700 million of this may be shelled out for cost reduction. For 2018, the analyst projects taxes to hit 16%, scaling “modestly higher” at approximately 18% down the line.

Amit Daryanani has a very good TipRanks score with an 87% success rate and a high ranking of #10 out of 4,774 analysts. Daryanani garners 28.5% in his annual returns. When recommending IBM stock, Daryanani earns 0.8% in average profits on the stock.

TipRanks showcases IBM as a stock that has drawn largely positive attention on the Street- with some analysts still choosing to play it safe. Out of 16 analysts polled in the last 3 months, 6 are bullish on the tech player, 8 remain sidelined, while 2 are bearish. With a return potential of 8%, the stock’s consensus target price stands at $171.00.