IBM's SEC Notice Isn't Changing Cantor Analyst's View

• International Business Machines Corp. (NYSE: IBM) shares are down 13 percent in the last three months, from a high of $161.99 on July 31.
• Cantor Fitzgerald’s Joseph Foresi maintained a Hold rating on the company, with a price target of $140.
• Although the path to recovery has begun, IBM’s core business continues to deteriorate, which could keep shares under pressure, Foresi mentioned.

The path to recovery has begun, with IBM reorganizing its business around Strategic Imperatives, analyst Joseph Foresi said, adding that these are new digital technology platforms, including Social Media, Mobile, Analytics, and Cloud - SMAC.

Foresi added, however, that IBM’s core business continues to deteriorate, which is delaying the company’s return to aggregate growth. He commented that IBM’s shares are unlikely to gain significantly until the company returns to aggregate growth.

IBM had announced the receipt of a Wells notice in August 2015 from the SEC. “A Wells notice is a letter the SEC sends to an entity as notification that the SEC is contemplating enforcement action, allowing the entity an opportunity to provide information as to why the enforcement action should not happen,” the analyst explained.

The SEC is conducting an investigation into IBM’s accounting treatment of revenue recognition of certain transactions in the US, the UK, and Ireland. “The Wells notice appears to be confined to a finite amount of transactions. We expect IBM to fully cooperate with the SEC,” the Cantor Fitzgerald report stated.

Although this notice from the SEC is “a potential incremental negative,” it does not impact “our overall investment thesis,” Foresi said.

IBM had $2.4 billion remaining in buyback authorization at the end of 3Q15, and has announced an additional $4 billion to its repurchase program.