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International Business Machines Corp. (IBM) Stock Does Not Look Good

IBM stock isn't cheap, and it isn't a growth story -- that's a deadly combo

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Struggling info tech giant International Business Machines Corp. (NYSE:IBM) is set to announce second-quarter results after the bell on Tuesday. Into the report, IBM stock is down about 8% year-to-date versus a 10% gain for the S&P 500. Some contrarian investors might see that as a setup for stock price outperformance into the end of the year.

International Business Machines Corp. (IBM) Stock Does Not Look Good
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But that won’t be the case with IBM stock. It’s not a growth story, and it’s not cheap.

Investors should stay away of IBM stock. Here’s why.

Analyst Revisions Ahead Of IBM Earnings

Analysts don’t really like IBM stock ahead of the earnings report. The average rating on the stock is a “hold.” The average price target from the always overly bullish analysts implies just 6.5% upside over the next 12 months. Earnings-per-share estimates for this quarter have come down from $3.17 to $2.75 in just 90 days.

A similar trend in downward EPS revisions can be seen for fiscal year 2017 and FY18.

Notably, Barclays analyst Mark Moskowitz recently came out with a bearish note ahead of the IBM earnings report. He reiterated an underweight rating on IBM stock and slashed the price target from $141 to $132 (implying almost 15% downside). Here is what Barcalys had to say about IBM stock in that note:

“The narrative is becoming tedious — a lot of investments in next-gen tech but with little revenue impact and with increasing dependence on cost take-outs or below-the-line items to manage EPS.”

Barclays’ take on IBM stock seems about right. It essentially has two separate segments right now: new IBM (which they call Strategic Imperatives) and old IBM (which doesn’t really have a name, but is the non-Strategic Imperatives stuff).

New IBM is booming thanks to huge investments in the right growth areas. Strategic Imperatives revenue rose 13% year-over-year last quarter. The big growth driver there was obviously Cloud (+35% year-over-year). But Analytics (+7% year-over-year), Mobile (+22% year-over-year), and Security (+10% year-over-year) are also growing nicely at IBM.

The problem is that these growth segments accounted for $34 billion in revenue over the last 12 months. While that’s a lot, it is only 42% of IBM’s total revenue. Unfortunately for investors, 42% of the business growing at a rapid rate isn’t offsetting declines at the other 58% of the business.

Last quarter, despite Strategic Imperatives revenue growth of 13%, total IBM revenues were down 2%. In fact, it has been a long, long while since IBM has posted positive revenue growth.

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Article printed from InvestorPlace Media, http://investorplace.com/2017/07/international-business-machines-corp-ibm-stock-not-good/.

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