Wait for a Wider Margin of Safety on IBM

For the year, revenue from continuing operations fell 12% year over year to $81.7 billion (declining 1% in constant currency). The analytics and cloud businesses were solid performers growing 16% and 57% during the year, respectively, but outsourcing and consulting and systems integration sales remained weak given intense competition. For the time being, we think IBM’s management team will have to manage its difficult core operating environment, foreign exchange headwinds, spending cycles, elevated investments levels, and transactional software spending – not an easy task. While IBM remains in an enviable position, long-term risks remain. Although the shares are likely to be trading at a discount to our fair value estimate, we would caution investors to seek a wider margin of safety before committing capital to the name.

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