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Stock Analyst Update

Ongoing Adjustments a Must for IBM

The firm's shift toward higher value enterprise IT is now necessary for the firm to avoid competitive relegation and commoditization.


 IBM’s (IBM) first-quarter results were mostly in line with our expectations, although revenue was slightly impacted by some execution issues in the storage hardware business given the fierce competitive nature of the industry. IBM’s storage hardware revenue slid 15% year over year. Meanwhile, IBM announced further repositioning efforts of its portfolio, primarily in SG&A. In what has become a trend, IBM’s ongoing portfolio readjustment toward higher-value enterprise IT is now necessary for the firm to avoid competitive relegation and commoditization. To that end, the firm’s higher-value Strategic Imperatives business accounted for 47% of its revenue over the past 12 months (up from 46% in the prior quarter), and for the quarter grew 10% over the prior year in constant currency. While the Strategic Imperative business continues to grow and will eventually become the majority of revenue, we do expect a gradual slowdown in the growth trajectory which is already being realized. Nevertheless, we think it is the right direction for the company if it is to achieve even modest midterm revenue growth. With management reiterating its full-year outlook and our view remaining unchanged, we maintain our $168 fair value estimate and narrow economic moat rating. With shares fairly valued, we’d seek a wider margin of safety before investing in the name.

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Andrew Lange does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.