Shares of International Business Machines (IBM) are down $7.16, or 3.5%, at $200.29 after the company last night reported Q1 revenue below analysts’ expectations while raising its year profit outlook above consensus.
Aside from software, results were weaker than expected across IBM’s various businesses, including hardware sales and IT consulting. Some regions struggled to match year-earlier growth, with the U.S., for example, showing flat revenue following a 7% rise in Q1 of last year, the company said. In services, IBM said it had a harder time with business in Japan and with public-sector customers in general.
Analysts participating in last night’s conference call seemed particularly worried about the backlog in IBM’s IT Outsourcing, which was down 5%, year over year, deemed a negative indicator of future outsourcing work.
Today, the bulls and bears seem to diverge over whether the “mixed bag” of last night’s results is a serious cause for concern. Price targets are going up in some cases, as are most estimates for this year’s profit, on that higher outlook, but some revenue numbers are staying as they were or actually being projected lower in some cases:
Shaw Wu, Sterne Agee:Reiterates a Buy rating and a $230 price target. He notes that “gross margin came in much higher than expected at 45.7% vs. expectations closer to 45%. Software (23% of revenue) continued to be its highest growth business while profitability in services (59%) improved.” Wu raised his 2012 estimate to $15.15 in EPS from a prior $15 in EPS while keeping his $109.1 billion revenue estimate.
Richard Gardner, Citigroup: Reiterates a Buy rating and raises his price target to $235 from $205. He describes the quarter as being “in line” with “puts and takes” here and there. “Consulting weakness was primarily driven by Japan and State & Local Govt, both of which should become smaller drags on revenue as the year progresses [...] There are other names in hardware that we believe
offer better returns over a six-month horizon, including Apple (AAPL) and�NetApp�(NTAP). However, ten years of portfolio pruning and acquisitions position IBM to deliver better revenue and EPS growth than either Hewlett-Packard (HPQ) or Dell (DELL) over a 2-3 year horizon, in our opinion.” Gardner raised his 2012 EPS estimate to $14.99 from $14.95 previously.
Shebly Seyrafi, FBN Securities: Reiterates a Sector Perform rating and a $215 price target. “IBM missed revenue consensus slightly, and it is
exhibiting slow or declining growth on a constant-currency basis across many of its key businesses (GTS, GBS, S&T, Financing) [...] Among its product categories, only software (up 7% at CC) grew well. In services (54% of pretax
profits), GBS profitability declined due to weakness in Japan and the Public sector. Still, the company is growing the bottom line well and deserves a market multiple.” Seyrafi raised his 2012 EPS estimate to $15.03 from $14.86, but actually cut his revenue outlook to $108.02 billion from a prior $109.26 billion.
Toni Sacconaghi, Bernstein Research: Reiterates a Market Perform rating and a $198 price target. It was a “typical” IBM report, he writes, with an EPS beat but “anemic” revenue. After factoring in currency effects and acquisition costs, the top-line miss was actually larger than might appear, he writes. ” The ability of IBM to parlay cost cuts into earnings upside may come to an end in coming years: “Given the magnitude of IBM’s cost reductions, we believe that the company is likely to hit a point of diminishing returns over time; we note that IBM already has best in class professional services
operating margins among onshore services vendors and has a significant percentage (40-45%+) of its workers offshore, though we believe this number could increase to 60-65%1. Additionally, we believe that IBM may lose some ability to access its offshore cash over the next 3-4 years absent a tax holiday or other changes in tax laws (as foreign credits are used up), which could limit IBM’s ability to boost EPS through share repurchases.”
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