IBM 'Turnaround Year' Is Coming, Says CLSA Analyst

CLSA issued a company note on International Business Machines Corp. (NYSE: IBM) after a disappointing earnings announcement amid core business weakness seen in recent quarters. CLSA rates IBM as Outperform, while lowering the price target from $161 to $140.

Analysts Louis Miscioscia, Ed Maguire, and Garrett Hinds wrote, "There have been many issues for IBM to overcome. Often IBM has moved too slow to fix businesses, like services, or created issues in software...it's been three years now of missing estimates and lowering expectations...We are now entering the third turnaround year."

Analysts at CLSA wrote two key reasons why IBM has shown weakness in earnings:

1. Software Business

In 2013, IBM initiated flexible pricing for its largest customers which analysts noted have hurt earnings expectations as its customers are spending less. While this initiative was meant to spur growth, other segments of the business without flexible pricing are growing, which is why CLSA questions the ideology of the flexible pricing scheme.

2. Domestic Business Operations

CLSA wrote that while growth in Europe was up one percent, the US/Americas was down 4 percent year-over-year which may be attributed to IBM's large accounts using flexible pricing and overall inefficient business operations. CLSA believes that 2016 will be a tough year for IBM, but notes that the company does have the opportunity to turn the business around.