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IBM's Strategy Is 'Right,' Wells Fargo Says; Others Less Sure

In a report published Friday, Wells Fargo analyst Maynard Um wrote that International Business Machines Corp. (NYSE: IBM) marked a "change in tone to one of a company going more on the offensive" during its Investor Day presentation.

Um noted that IBM highlighted its long-term growth strategy around cloud, mobile, security and Watson. The analyst explained that the presentation reinforced a view that the company is now refocused with a "retooled" portfolio geared toward strategic areas. However, the new strategy will likely drive growth, but the transition will take time.

"We have long believed IBM was well positioned in the industry given the breadth of its analytics capabilities through numerous acquisitions as well as its deep domain expertise in a wide array of verticals, which we believed would allow it to offer vertically-focused solutions that few others could provide from an end-to-end perspective," Um wrote.

Related Link: Does Warren Buffett See Something In IBM That Others Don't? Bernstein Analyst Illuminates

Um added that IBM's long-term model implies roughly $20 in earnings per share in 2018 as the company will grow revenues, pre-tax income and earnings per share at a low-mid and high-single digit rate, respectively through 2018. The company also remains committed to returning cash to shareholders and reiterated its target of free cash flow realization in the 90 percent range.

Bottom line, IBM is in the midst of transforming its business and taking the correct strategic steps today. Nevertheless, shares remain Market Weight rated with a valuation range of $155 to $165 based on an approximate 10x multiple on a 2015 earnings per share estimate of $16.06.

What Else Does The Street Have To Say?

Sherri Scribner of Deutsche Bank commented in a note that IBM "continues to take actions" to shift its business to higher value segments, but warned that growth remains "challenged" given the company's size and reliance on slower growing segments.

"Over the next three years, we expect the declines in core segments to more than offset any growth in strategic imperatives business, limiting revenue growth," Scribner wrote. "Given the lack of growth, we expect shares to be range bound and expect the stock to trade modestly below historical multiples."

Scribner rates shares with a Hold rating and $160 price target.

Katy Huberty of Morgan Stanley also commented in a note on IBM's Analyst Day and stated that the company's message on strategic direction and long-term financial goals were "the clearest and most reasonable" in several years.

However, Huberty noted that accelerated investments, currency concerns and weak software and services profit trends limit upside estimates and pressure sentiment in the near-term.

"Near-term, accelerated investments along with profit pressure in core software (due to large account bundling) and services and currency, which is now a one point greater headwind, all pressure profit trends and investors sentiment," Huberty wrote. "To the extent these headwinds fade into 2016, we see the potential for investors to shift focus to the more attractive long-term outlook."

Huberty rates shares with an Equal-weight rating and $159 price target.

Latest Ratings for IBM

Jan 2015

Deutsche Bank

Maintains

Hold

Jan 2015

Stifel Nicolaus

Maintains

Buy

Jan 2015

Citigroup

Maintains

Neutral

View More Analyst Ratings for IBM
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© 2015 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

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