A few views from around the Street:
Richard Williams, ICap, who has a Sell rating on the shares and thinks they could fall to $60 (ouch!): “IBM reiterated its previous expectations for about 10% ESP growth in FY07. Therefore, we are raising our ’07 estimate to $6.58 from $6.48 to adjust from the outperformance in 4Q. However, this keeps us just about in line with the Company’s 10% expectation, as FY06 came in at $6.06/sh. IBM put up what looked by most measures a very solid qtr, yet in after-hours trading the stock was down around 5% indicating a substantial degree of disappointment from the Street.
When we consider the whisper numbers going into the qtr, the disappointment makes somewhat more sense with expectations getting pretty far out of hand. But using our seasonally adjusted sequential (SAS) growth metric really shows the story quite clearly. IBM had been accelerating its growth for the previous 4 qtrs, but looking forward growth falls dramatically. The stock has also run up almost in a straight line with only a 3.2% dip along the way to break a run of virtually no volatility. [T]he dramatic drop in growth coming out of guidance takes all the happy feelings and expectations while leaving all the risks and concerns associated with a sharp slowdown in sales.”
David Wong, A.G. Edwards, who has a Hold rating on the shares: “The bulk of the upside to our own estimate was the result of higher “intellectual property and other income” as well as a lower tax rate than we had originally estimated. Nevertheless, IBM is continuing to consistently deliver impressive EPS growth which is above its sales growth. We are raising our full year 2007 estimates for EPS in 2007 by $0.23, largely as a result of a higher revenue estimate and a lower tax rate assumption (28.5% instead of 30%). IBM’s price to sales has recently been about 1.6x, which although is above the price/sales range of 0.7-1.3x of other large computer oriented or IT services companies such as Hewlett Packard, Dell, EDS and Accenture, but within the 1.3-2.0x range the stock has traded over the past several years. As such we consider IBM’s stock fairly valued at current levels.” David Grossman with Thomas Weisell, who has an Overweight rating on the shares but no price target: “IBM’s price to sales has recently been about 1.6x, which although is above the price/sales range of 0.7-1.3x of other large computer oriented or IT services companies such as Hewlett Packard (NYSE:HPQ), Dell (NASDAQ:DELL), EDS (NASDAQ:EDS) and Accenture (NYSE:ACN), but within the 1.3-2.0x range the stock has traded over the past several years. As such we consider IBM’s stock fairly valued at current levels. [S]uccessful execution over the next several months could favorably affect the company’s valuation relative to the broader market. We believe the shares are attractively valued at current levels.” Peter Misek, with Canaccord Adams: “Global Services bookings were far better than we had anticipated and, combined with a strong pipeline of opportunities entering F07, we believe that the Global Services division could perform well in the latter half of F07.Overall, we are impressed with IBM’s performance during the quarter, but due to the recent run-up in the share price, we await an improved risk-return trade-off prior to an upgrade. We reiterate our HOLD recommendation and US$100.00 target price based on our DCF and industry comps.”
And what that sluggish outlook means is that IBM is being thrown into the same boat as Apple (NASDAQ:AAPL) and Intel (NASDAQ:INTC), whose recent outlook is causing people to doubt the near-term health in computer hardware sales. Bloomberg has a nice writeup on this tech malaise on its site.
Whether or not IBM spells trouble for hardware sales, kudos must be given to my colleague Leslie Norton at Barron’s magazine, who, as I noted a couple weeks ago, wrote a bullish piece on IBM and its services business back on Dec. 4. It seems services were indeed one of the surprisingly strong parts of last night’s report.
IBM 1-yr chart