IBM: Bruised But Not Broken
Third-quarter results were disappointing, but this wide-moat tech giant remains a firm in transition, writes Morningstar’s Pete Wahlstrom.
As we stated last quarter, IBM is still a firm in transition and our financial model continues to bake in several more quarters (if not a few more years) of relatively choppy performance. Even though management has steadily acknowledged that it is working through a multiyear transition, the quarterly result was still disappointing as it likely sets up yet another year of flat (if not slightly lower) free cash flow in 2016.
We expect to update our model based on the results and outlook, however, after lowering our fair value estimate last month to $174 per share, we don't expect to make another change at this time. We're certainly not pleased with the quarter, but we don't think IBM's business is broken. We had expected that the transition would take several years and, case in point, the prospect of a flat top-line and only modest free cash flow growth (starting at least two years out) were already baked into our base-case financial model.
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