Cantor Fitzgerald analyst Brian J. White rates International Business Machines Corp. (NYSE:IBM) as a Buy as the tech giant is set to announce its 4Q13 earnings report tonight after the market closes.

International Business Machines Corp. (IBM) Q4 Earnings Preview

IBM earnings

After the close tonight (1/21), International Business Machines Corp. (NYSE:IBM) is scheduled to report its 4Q:13 earnings results with a conference call at 4:30 PM ET. Although we expect a relatively muted IT spending environment in 2014 (albeit less volatile than 2013), there have been a few constructive quarterly results from leading IT-related players over the past month that provide a less downbeat backdrop relative to the tone going into 3Q:13. After a tough year, IBM’s stock significantly underperformed the S&P 500 Index in 2013 (down 2% vs. up 30%); however, we believe investors could warm up to the name in 2014 as reflected in our price target.

We expect revenue cycle to bottom

We believe International Business Machines Corp. (NYSE:IBM) will beat our 4Q:13 revenue estimate of $27.0 billion (down 8% YoY) but we do not expect upside versus the Street sales forecast (FactSet Consensus is at $28.27 billion), while beating our EPS projection of $5.83 and exceeding the consensus estimate of $5.99.

IBM led by strength in software

Recall, International Business Machines Corp. (NYSE:IBM) experienced weakness in China and other developing markets in 3Q:13, a trend we expect to continue through the first half of 2014. For 4Q:13, we are modeling all segments to grow QoQ. For example, we are modeling Services sales (59% of 3Q:13 sales) to grow by over 3% QoQ in 4Q:13 and in line with seasonality, while we are projecting Software sales (24%) to rise by 34% QoQ and better than seasonal trends. We believe Software sales have upside potential in 4Q:13. Finally, we are modeling System & Technology sales (14%) to grow by 25%, well below historical averages, and we believe there could be upside potential.

2014 EPS outlook and existing 2015 guidance

Looking into 1Q:14, we believe our revenue projection of $23.1 billion (Consensus is at $23.3 billion) and EPS estimate of $3.32 (Consensus is at $3.28) appear reasonable, especially with a later Easter holiday (4/20). We expect International Business Machines Corp. (NYSE:IBM) to provide a 2014 EPS outlook that approaches our $17.88 projection, while we believe IBM’s $20.00 EPS guidance for 2015 can be reiterated. This will be IBM’s first earnings call with its new CFO.

IBM’s valuation

Our $220.00 price target is based on just over 12x our CY:14 pro forma EPS estimate. Over the past five calendar years, IBM has grown EPS by 16% per annum versus 4% growth for the S&P 500 Index.