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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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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Peter Wahlstrom

Sector Director

Peter Wahlstrom, CFA, is director of technology, media, and telecom equity research and a senior software analyst for Morningstar. In addition to leading Morningstar’s technology, media, and telecom sector team, he is also a member of the firm’s Economic Moat committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar. He joined Morningstar in 2010 as an equity analyst and served as director of equity research for the consumer team before assuming his current role.

Before joining Morningstar, Wahlstrom worked in the investment research divisions of Goldman Sachs and RiverSource Investments (Ameriprise Financial).

Wahlstrom holds a bachelor’s degree in economics from the University of Illinois and a master’s degree in business administration from Indiana University’s Kelley School of Business. He also holds the Chartered Financial Analyst® designation. In 2012, Wahlstrom ranked third in the Specialty Retail industry in the StarMine Analyst Awards, presented by the Financial Times.

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