Despite the 7% decline in shares over the last 3 months,
Barclays is downgrading International Business Machines (
) to Equal Weight from Over Weight.
Critically, the shift to SaaS (Software as a Service) and the
Cloud has negatively impacted IBM's segments. This shift is still
in the early stages, and is set to be even more disruptive to the
company in 2014, according to the analyst.
Although IBM trades at slightly more than 10x 2014 earnings,
shares are still expensive on a cash flow basis.
Barclays is now evaluating IBM on a cash flow base (versus
earnings) until revenue starts to grow meaningfully. As an aside,
consensus revenues are projected to grow just 2% year over year in
FY13, which compares to a 2% year over year decline in FY12.
The definition of free cash flow (
) for IBM excludes global financing receivables. On the firm's
estimate for FCF would imply a yield of 7%, which is well below the
industry average of 10%.
This average includes peers such as Cisco (
), Hewlett Packard (
), Apple (
), EMC Corp (EMC), Lexmark International (LXK), NetApp Inc (NTAP),
and Xerox (XRX).
As such, the analyst is lowering his target for IBM to $190
based on 11x FY14 FCF/share estimate. This reflects a free cash
flow yield more in line with technology bellwethers (with slower
top line growth). The previous price target was $210.
IBM 181.96 -0.05 -0.03
CSCO 22.86 -0.03 -0.13
HPQ 20.03 0.00 +0.01
AAPL 487.53 -0.22 -0.05
EMC 25.30 -0.02 -0.08
LXK 34.05 +0.12 +0.35
NTAP 41.92 0.00 0.00
XRX 10.37 -0.03 -0.29