IBM Stock Expected to Fall on News of Federal Suspension

A $80-million bid IBM Corp. (IBM) made in 2006 to modernize the U.S. Environmental Protection Agency’s financial systems has led to a investigation and temporary suspension from it seeking new federal government contracts.

However, the U.S. government contributes only 2% of IBM’s total revenue, roughly half of which comes from existing multi-year contracts that are not expected to be affected by the suspension, according to Citigroup analyst Richard Gardner. Since he viewed consensus revenue and earnings estimates before the annoucement as conservative, Mr. Gardner sees no need for a reduction.

IBM has 30 days to contest the suspension and has suggested it will do so. However, the suspension could last as long as a year, Mr. Gardner told clients in a note.

He reiterated his “buy” rating and $146 price target on IBM shares, despite their recent rebound. The analyst believes that “declining pension expense, ongoing cost productivity initiatives and share repurchase will deliver virtually all of the EPS growth expected by the Street.”

Goldman Sachs analyst David Bailey said it is important to note that the ban does not appear to have impacted IBM’s March quarter close.

He estimates the impact to its bottom line would likely be around $0.02 per share of earnings if IBM is suspended for an entire quarter. But the analyst thinks the computer services giant could make this up elsewhere.

So while Mr. Bailey expects IBM will be down sharply on the news, he maintained a price target of $125.