UBS Downgrades IBM On Expectations Of Continued Transactional Business Pressures

IBM Common Stock (NYSE: IBM) may face significant challenges in sustaining mid-single-digit revenue growth due to transaction declines, according to UBS.

The Analyst

UBS analyst Munjal Shah downgraded IBM from Buy to Neutral while reducing the price target from $170 to $140.

The Thesis

Persisting challenges in Global Technology Services, which accounts for around 35% of IBM’s revenue, are likely to weigh on the company’s performance, Shah said in the note.

He explained that transactional businesses had been impacted by lower volume and an improvement in trends was unlikely given that backlog is down more than $10 billion since 2016 and signings have declined by 9% in the first three quarters of 2019.

Pressure in IBM’s legacy businesses may partly offset growth from the first year of its mainframe cycle and the Red Hat acquisition in 2020, the analyst mentioned. He added that 2021 may be “even more challenging” for IBM, with heightened revenue pressure due to tough mainframe comparisons and a lower incremental contribution from Red Hat.

Currency headwinds could add to the company’s woes. Shah further mentioned that IBM is unlikely to repurchase shares, due to its efforts to reduce debt, which would “limit EPS growth outside of deleveraging.”

The analyst reduced the EPS estimate for 2020 and 2021 from $13.80 to $13.50 and from $13.86 to $14.70, respectively, mainly to reflect lower revenue growth.

Price Action

Shares of IBM were down 0.76% at $133.07 at the time of publishing Monday.

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