International Business Machines Corp.’s stock is on pace Thursday for its best single-day performance since October, after the company reported better-than-expected results for its June quarter.
IBM IBM, +2.82% shares were up 3.2% at noon Eastern time Thursday, following an earnings report released Wednesday afternoon in which IBM posted adjusted earnings of $3.08 a share on revenue of $20 billion.
Analysts, however, aren’t completely sold on the latest numbers, with many highlighting the uneven performance among the company’s various business segments. While the only rating change tracked by FactSet was an upgrade to buy from Morningstar Research, at least five analysts brought down their price targets while only one increased a target.
Deutsche Bank analyst Sherri Scribner argued that while the numbers looked good on the surface, they were buoyed by the mainframe cycle. She questioned whether the company would be able to keep up its growth as the cycle turns over.
“Post results, we continue to see secular headwinds impacting IBM’s businesses and expect sustainable growth to remain challenged,” Scribner wrote. She is also worried about declines in IBM’s ”Cognitive Solutions” business, which she calls a key element of the company’s efforts to transform itself.
Scribner lowered her price target to $150 from $160 following the “OK quarter” and kept her hold rating intact.
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Bernstein analyst Toni Sacconaghi titled his note to clients “Mainframe much better than expected — but was anything else?” and voiced similar concerns to Scribner’s.
“While this mainframe cycle is indeed stronger than nearly anyone expected, we continue to believe that mainframes are a cyclical business in slow, secular decline, and this year’s strength will create incrementally tough compares — as will IBM’s tax rate — for next year,” he wrote.
Sacconaghi saw both good and bad in the quarter. On the plus side, he said, IBM managed to post revenue growth, improve its margins and make progress on its services backlog. However, Sacconaghi is concerned about the company’s rather slow pace of services signings, against easy comparisons, as well as management’s lack of commitment toward gross margin stabilization, which had previously been a stated objective.
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He rates the stock at market perform with a $150 price target.
Instinet’s Jeffrey Kvaal, an IBM bull, grew more optimistic about the company after seeing the latest results, raising his target price to $170 from $160. Kvaal saw progress with the company’s “Strategic Imperatives” businesses, though he said declines in legacy areas were accelerating.
“IBM is hardly firing on all cylinders,” Kvaal wrote. Nonetheless, he is increasingly upbeat that the company can return to sustained growth.
Of the 23 analysts tracked by FactSet who cover IBM, 8 rate the stock a buy, 13 rate it a hold, and 2 label it a sell. The average price target is $164.10, 9.5% above current levels.
IBM shares are up 1.3% over the past 12 months, compared with a 14% gain for the S&P 500 SPX, -0.40%
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