Wedbush Securities has raised its price target on International Business Machines Corp (NYSE:IBM) ahead of Big Blue’s earnings update due this evening.
The new price target is US$185, up from US$155, although the neutral rating has been maintained by the broker.
Wedbush’s survey of information technology (IT) spending in 2017 indicated a gradual improvement in overall IT spending, which should provide a tailwind for IBM.
The broker is not wowed, however, by the group’s “slow transition into digital, especially in its various IT Services division’s practices.
It believes results at the IT Services division will have been affected by a combination of model delivery shift changes as well as pressure on prices and therefore margins, as contracts come up for renewal.
It also calls IBM’s multi-billion mergers & acquisitions (M&A) effort “uninspiring”, targeting the software space. It believes the M&A initiative has, and will probably continue to have, a detrimental effect on margins and free cash flow.
“The bottom line: IBM remains in a ‘work-in-progress’ mode, as it continues to convert its revenue base away from an asset/labor-intensive legacy model into asset/labor-light ‘digital’ solutions,” the broker said.
“From our perspective, any signal of a more aggressive restructuring effort (at IBM's legacy software and services practices) could make us incrementally more constructive on the stock,” it added.
IBM will release quarterly earnings after the close of open-outcry trading today. Analysts are expecting quarterly earnings per share of US$5.17 on revenue of US$22.05bn.
Shares in IBM were up 0.7% at US$169.52 in early deals.