UBS Cuts IBM's (IBM) Target Price on Weak Software

UBS analyst, Steve Milunovich believes IBM (NYSE: IBM) is headed into another transition year. Investors will be bothered by the 6% decline in software revenue despite company assurances it will improve and 2016 EPS is likely to drop 10%. No change to Neutral rating but dropping PT to $132 from $145.

IBM reported 4Q results roughly in-line though a lower tax rate was required to beat consensus. Guidance for 2016 profit and cash flow was worse than expected though unexpected currency accounts for most of the "miss." Although the 2016 currency hit is only a few hundred million, the YoY swing due to lower hedging gains causes a $1.3bn or $1.10 negative swing to EPS. Non-GAAP EPS should be at least $13.50 compared to the $15.00 consensus though ex-currency EPS is down only modestly.

IBM has said that software is the swing factor on earnings, which is not encouraging since software declines accelerated through the year. The analyst is looking for about a 3% constant currency decline. Customers are likely using the flexibility of their ELAs as discounting with ServiceNow and other new rivals appear to be gaining share.

Management appears convinced it has the right strategy and that time is required to execute it. Strategic imperative revenue rose to 35% of the total. Despite prior guidance of reaching at least 40% by 2018, it could exceed 50% during 2017—in part because core franchise (legacy) revenue is falling quickly.

For an analyst ratings summary and ratings history on IBM click here. For more ratings news on IBM click here.

Shares of IBM closed at $128.11 yesterday.

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