Credit Suisse Says IBM Performance 'Divergent' Of Fundamentals

Credit Suisse’s Kulbinder Garcha pointed out that International Business Machines Corp. (NYSE: IBM) shares have appreciated 17 percent year-to-date, despite there being little signs of an inflection within the business.

Garcha maintains an Underperform rating on the company with a price target of $110.

Impact Of Fundamentals

“We acknowledge less currency headwinds and ~3.5 percent dividend yield could somewhat help the stock in a low interest environment. But we equally point out the worsening fundamentals will eventually make the lofty valuation vulnerable,” the analyst mentioned.

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In fact, Garcha expects IBM to miss its full-year EPS guidance and believes restructuring is unlikely to have helped the company meet its target.

Ineffective Cost Savings

Although IBM announced a cost saving plan in Q1, the analyst believes the plan had minimal effectiveness, given that most of the savings were to be reinvested rather than being dropped to the bottom line.

Garcha also pointed out the company’s restructuring plans have not been very effective in the past either.

In addition, the analyst stated that top line was unlikely to stabilize before 2018. Even if the company could grow SI at 13 percent per year, Garcha expects the core to decline at 11–12 percent year-on-year in 2016/17.

SI has already been seeing a meaningful slowdown of 8 percent year-on-year organically in Q2:16.

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