IBM Sees Improvement in Second Quarter
We are maintaining our $168 fair value estimate and narrow economic moat rating for the firm.
IBM's (IBM) second-quarter result marked an improvement in the company's underlying growth rate with management touting that its constant currency growth rate of 2% year over year was the best in seven years. However, in what's become commonplace, the firm's balancing act between higher growth strategic and low-to-declining nonstrategic imperatives continues to overhang the company, which is expected to keep the firm's top line suppressed over the midterm. The performance of the systems business (which is benefiting from the recent release of the z14 mainframe product line) certainly bolstered IBM's quarterly result, but we expect the cyclicality of this business to provide only a periodic boost given traditional mainframe refresh cycles. Over the midterm, one green shoot we are more focused on is IBM's services businesses, which encapsulates both global business services, or GBS, and technology services & cloud platforms, or TS&CP. In what has been a long-term struggle, both businesses posted year-over-year growth (albeit very modest). Still, we think IBM's world class services organization continues to have an important role in providing digital transformation services, particularly around hybrid cloud management and managed security services. If IBM can successfully reinvigorate these services businesses and generate more industry-like growth, we would become more bullish on the name (we'll monitor services signings and cloud-related growth in the interim). Nevertheless, with management reiterating it full-year outlook and our view unchanged, we are maintaining our $168 fair value estimate and narrow economic moat rating. With shares approaching 3-star territory in after-hours trade, we think the firm is only modestly undervalued, although it may appeal to dividend seeking technology investors.
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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.