IBM Posts Mediocre Quarter; Shares Fully Valued

IBM reported a mediocre second-quarter result. Revenue growth was slightly softer than we had expected due to some currency impacts, while earnings per share growth showed some resiliency, given the company's share-repurchase program and discrete tax benefits.

IBM has been focused on growing revenue from its strategic imperatives including social, mobile, analytics, cloud, and security technologies, but revenue growth in these areas showed a marked year-over-year slowdown, growing only 7% in constant currency to $8.8 billion.

However, management was quick to point out that its strategic imperative growth now mostly reflects organic growth and that the firm is expecting a better performance in the second half of the fiscal year. The optimistic second-half outlook is backed by IBM's introduction of its z14 mainframe in September, which is expected to have a significant impact in the fourth quarter, and several large services projects ramping up during the same time frame. As a result, management's full-year outlook is unchanged.

We reiterate our $158 fair value estimate and narrow economic moat rating. With shares trading in 3-star territory, we'd seek a wider margin of safety before committing capital to the name.