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Stock Analyst Update

Underwhelming Results for IBM

We're maintaining our fair value estimate on the narrow-moat company.


 IBM (IBM) posted an underwhelming third-quarter result with the firm continuing to perform its juggling act across higher growth strategic and low-to-declining nonstrategic business lines. While management was quick to highlight areas of growth and margin expansion, the firm’s ongoing challenge with legacy revenue streams was apparent and we were particularly surprised by the level of weakness in the firm’s cognitive solutions business. Within cognitive solutions, both solutions software and transaction processing software posted notable declines owing to challenges in areas like collaboration, commerce, and Z middleware. To that end, on the Z mainframe front, we expect IBM to face tougher growth comparisons given the successful launch of the z14 mainframe line toward the end of last fiscal year and a future sales lull due to the cyclicality of what we determine is a secularly declining mainframe business. However, on a positive note, IBM’s services businesses showed good signs of improvement with digital transformation demand leading to growth for areas such as consulting and infrastructure services. 

After slightly adjusting some midterm assumptions, our fair value estimate remains $168 per share on this narrow economic moat name. Investor sentiment remains low on IBM and we think the company is trading at a modest discount (current price implies a fiscal 2018 adjusted price/earnings ratio of 10 times), which may appeal to risk-seeking technology investors.

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Andrew Lange does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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