IBM's Margins Were The Big Problem

Although International Business Machines Corp. (NYSE: IBM) reported beat results for FQ3:16, Credit Suisse’s Kulbinder Garcha noted that the underlying profit strength was disappointing.

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

Limited Improvement In Margins

The analyst mentioned that at first glance, the results appeared better than expected, with revenue declining on 0.3 percent year-on-year to $19.2 billion and EPS at $3.29, both metrics beating the consensus forecasts but missing the estimates.

“The results were again helped by non-operational measures, which we find concerning. We believe the secular and structural challenges facing IBM remain, and specifically see limited improvement in Services and Software margins,” Garcha stated.

The analyst pointed out that the EPS beat was helped by a 14 percent tax rate, while IP revenue of $528 million helped PTI by $320 million or EPS of $0.27.

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Low Visibility

Management noted that this was driven by new licensing deals that might be sustainable, although the analyst noted that visibility regarding this was low.

“While the company reiterated its FY16 $13.50 EPS guidance, the issue is this year's numbers include $0.9 billion of one-time items that are unlikely to recur,” according to the Credit Suisse report.

The EPS estimates for 2016 and 2017 have been lowered from $13.32 to $13.23 and from $12.96 to $12.74, respectively.

In Tuesday's pre-market session, IBM was seen down 2.67 percent at $150.64.

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