International Business Machines Corp. (IBM) Only Upside: White

Cantor Fitzgerald analyst Brian J. White reitirates his Buy rating for International Business Machines Corp. (NYSE:IBM), predicting that the sales decline for the ailing company has bottomed out, meaning it can only do better from here.

Last night, International Business Machines Corp. (NYSE:IBM) reported 4Q:13 results that exceeded our projections, and the company provided what we consider a palatable 2014 EPS outlook, while maintaining its 2015 EPS projection. Although IBM warned of weak EPS performance in 1Q:14, this softness versus our estimate is driven by a restructuring charge that most tech companies would exclude from operating performance. Based on current estimates, our model now suggests that International Business Machines Corp. (NYSE:IBM)’s sales cycle bottomed in 4Q:13, and we are projecting the operating profit cycle to trough in 1Q:14, providing us with a view that the worst is over for International Business Machines Corp. (NYSE:IBM) in the intermediate term. As such, we reiterate our BUY rating and $220.00 price target.

IBM Delivers Sales Upside On Our Estimate

International Business Machines Corp. (NYSE:IBM) reported 4Q:13 sales of $27.7 billion that beat our revenue estimate of $27.0 billion (Street was at $28.3 billion), while pro forma EPS of $6.13 exceeded our $5.83 projection (Street was at $5.99) with the benefit of a lower tax rate. This print represents a 17% sequential sales increase and is better than the six-year average growth of 15%

Software and Systems & Technology Outperform in 4Q:13

During 4Q:13, Services backlog was up 5% YoY in constant currency (up 2% reported) to $143 billion. International Business Machines Corp. (NYSE:IBM) delivered upside in the Systems & Technology segment relative to our estimate (albeit a very challenged business) with sales growing by 31% QoQ (vs. our up 25% estimate) and Software increasing by 40% (vs. our up 34% estimate), while the Services sales grew by by 4% QoQ and slightly ahead of our up 3% projection.

A Solid $18.00 EPS Outlook for 2014 and $20.00 Reiterated in 2015

International Business Machines Corp. (NYSE:IBM) indicated that it feels confident in delivering at least $20.00 in operating EPS in 2015 and provided a 2014 operating EPS guidance of at least $18.00. Looking into 1Q:14, we are maintaining our revenue forecast at $23.1 billion (Street is at $23.3 billion) but are cutting our pro forma EPS estimate to $2.53 from $3.32 (Street is at $3.28) to reflect a restructure charge of approximately $1 billion. For 2014, we are slightly raising our pro forma EPS estimate to $18.03 from $17.88.


Our $220.00 price target is based on just over 12x our CY:14 pro forma EPS estimate. Over the past six calendar years, International Business Machines Corp. (NYSE:IBM) has grown EPS by 15% per annum versus approximately 4% growth for the S&P 500 Index.

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