We reiterate our Neutral recommendation on
International Business Machines Corp.
) primarily due to its sluggish top-line performance over the
last two quarters. Moreover, tepid growth in the services segment
and continued decline in its hardware revenues also keeps us
cautious on the stock.
We believe increasing volatility in the outsourcing business
is expected to impact IBM's revenue and earnings power in the
near term. The company could miss revenue targets and top-line
growth may decelerate going forward due to the reduction in
long-term signings. Moreover, increasing competition from
) in the hardware segment is a cause of concern going
IBM's strong market share and growth in the enterprise segment
make it dependent on enterprise and government IT spending
patterns. Therefore, the company's results closely follow the
industry trends. As government spending contributes a significant
portion of IBM's top line, we believe any decline in IT spending
does not bode well for the company going forward.
Nonetheless, we believe that IBM remains well positioned for
long-term growth based on its four key growth initiatives:
smarter planet, growth markets, business analytics and cloud
computing, which are expected to deliver at least $50 billion in
revenues by fiscal 2015. Further, IBM's strong product pipeline,
expansion into emerging markets and continuous acquisitions will
help it to achieve this target going forward.
Moreover, IBM's restructuring efforts are making headway,
resulting in an improved bottom line. Further, the combination of
a better business mix, improving operating leverage through
productivity gains and increased investment in growth
opportunities will augment growth in 2012 and beyond.
We also remain positive on the company's growing profit
margins coupled with strong cash flow generating abilities. The
company's effort to return $20 billion in the form of dividends
to its shareholders over the next five years is also commendable.
Additionally, strong cash flow abilities give IBM the financial
flexibility required for strategic investments in the changing
business environment. Considering the company's liquidity and
emphasis on profitability, we believe IBM's solid growth rates
may be sustainable.
Currently, IBM has a Zacks #3 Rank (Hold).
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