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Goldman Gives IBM Congrats On The Quarter, But Sees No Inflection Point Yet

Goldman Sachs expects International Business Machines Corp. IBM 0.3% shares to hold its recent gains post a solid quarter, but the brokerage is yet to become constructive on the shares as it maintained its Neutral rating.

"[W]e believe it is still too early to call for an inflection in fundamentals as the trends in most of IBM's segments were unchanged – with Software continuing to decline organically driven by transactional weakness, GBS under pressure given the run-off of legacy offerings, and continued solid results in Tech Services & Cloud," analyst James Schneider wrote in a note.

IBM reported second quarter revenue of $20.2 billion, bracketing GS/ Street at $20.4 billion/$20.1 billion. Non-GAAP EPS of $2.95 bracketed GS/Street at $3.00/$2.89, as lower gross margin offset lower OpEx.

IBM reiterated 2016 EPS guidance of at least $13.50 (versus the Street at $13.50 and GS at $13.60), and FCF guidance at the high end of the $11-$12 billion range.

Schneider noted an inflection in revenue is needed to drive a sustained re-rating from current levels. Given the 30 percent increase in the stock from lows in the first quarter, the analyst believes the stock will struggle to work sustainably higher in the near term as a result of ongoing headwinds in the core business.

"We could be more constructive if we begin to see sustained improvement in Software & Services revenue (which our CIO survey and scenario analysis suggest could occur within 18 months)," Schneider noted.

As such, Schneider's 2016/17/18 EPS estimates are unchanged at $13.60/$14.70/$16.00.

Schneider has a price target of $147 on the stock.

Jul 2016Goldman SachsMaintainsNeutral
Jul 2016Credit SuisseMaintainsUnderperform
Jul 2016CitigroupMaintainsNeutral

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