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.

IBM

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.