Morgan Stanley analyst Katy L. Huberty raised her price target on IBM to $140 from $128, assigning an “Equal-weight” rating to the stock and said the world’s largest computer firm is making bolder moves by reducing dependency on legacy businesses and accelerating investment but there is still work to do.
American multinational technology company announced the tax-free spin-off of its Managed Infrastructure Services business, which is expected to be completed by the end of next year. Managed Infrastructure Services represents the majority of GTS, excluding the IBM Public Cloud and Technical Support Services businesses. The deal will create NewCo, a managed infrastructure services company with $19B TTM revenue that will focus on IT infrastructure modernization.
“Our SOTP reflects 15% upside, but we are cautious about recognizing this near-term. Without full transparency into the balance sheet and cost breakouts, we ran an initial SOTP based on EV/Sales to provide a preliminary view that points to $151/share valuation. We value each of IBM’s sub-segments separately based on a range of industry peers. Our analysis also credits IBM with unlocking an incremental $2.5B of revenue that was previously recorded in internal transactions, adding $5/share to valuation,” added Huberty, who also gave a price target of $180 in a best-case scenario.
“This aligns with a disclosure from the conference call for $19B NewCo revenue and $59B RemainCo revenue over the last 12 months, totalling $78B compared to a reported $75.5B. We include only operating cash and debt in our analysis given financing debt is supported by financing assets. Our updated PT of $140 (from $128 previously) blends our prior EV/FCF sales valuation and SOTP (50/50) to give partial credit to unlocking value in the SOTP given the spin announcement and increased focus on portfolio optimization.”
IBM’s shares rose 0.16% higher at $131.49 in pre-market trading on Friday; however, the stock is down about 2% so far this year.
Several other equity analysts have also updated their stock outlook. Independent Research raised their target price to $135.00 from $131.00 but rated hold; Credit Suisse upped their stock price forecast to $161 from $155. Citigroup boosted their target price on IBM to $140 from $120 and gave the company a “neutral” rating. JP Morgan Chase & Co. boosted their target price to $148 from $135 and gave the company a “neutral” rating.
Thirteen analysts forecast the average price in 12 months at $141.55 with a high forecast of $155.00 and a low forecast of $115.00. The average price target represents a 7.65% increase from the last price of $131.49. From those 13 equity analysts, five rated ‘Buy’, seven rated ‘Hold’ and one rated ‘Sell’, according to Tipranks.
“The spin of Infrastructure Services is a step in the right direction to drive sustainable revenue growth, but our conviction is reduced due to cautious results from our AlphaWise CIO surveys pointing to Services and AI most at risk of spending cuts and lower spending intentions with IBM following the Red Hat deal,” Morgan Stanley’s Huberty said.
“Near-term, we expect greater recurring revenue to pressure performance versus peers as IT spending rebounds off recent lows. Despite valuation below Services and Software peers, near-term macro factors and lack of conviction around IBM’s ability to stabilize revenue in the medium to long-term keep us Equal-weight.”
Upside risks: 1) Short-lived recession followed by pent up demand. 2) More material divestitures or M&A to accelerate growth. 3) IT spend upside, esp. Cloud & Cognitive, tied to Data Era projects. 4) Faster execution & upside on RHT synergies – highlighted by Morgan Stanley.
Downside risks: 1) Slowing GDP & IT spend drive sustained revenue declines. 2) Failure to monetize investments. 3) aaS growth stalls as mgmt focuses on margins. 4) Accelerated cloud cannibalization in core markets.
This article was originally posted on FX Empire
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