Stifel, a financial services firm, raised its price target on shares of IBM (NYSE:IBM) to $246 from the previous target of $205, while keeping a Buy rating on the stock. The firm's analyst noted IBM's third quarter as typically weak, but suggested a modest outperformance in earnings per share (EPS) is more likely than revenue growth.
The analyst pointed to favorable foreign exchange (FX) rates, which could positively impact IBM's earnings in the upcoming quarters, estimating a +140 basis points (bp) in the third quarter of 2024, +120bp in the fourth quarter of 2024, and +50bp in 2025. The setup for 2025 remains positive, with software acquisitions expected to add 4% to segment revenue growth and approximately 2% to IBM's consolidated growth.
For the year 2025, it's anticipated to be a strong year for Enterprise License Agreement (ELA) renewals, which should provide a tailwind to revenue and margins. Additionally, the new mainframe cycle is expected to drive significant growth in the Infrastructure segment in 2025. Consulting, on the other hand, may see 2024 as the cyclical bottom, with margins benefiting from known cost actions, contributing over 40bp to the 2025 pre-tax income (PTI) margins. The ongoing improvement in consulting gross margin is seen as an opportunity, currently 600bp below peers.
Stifel forecasts a roughly 5% constant currency revenue and EPS growth for IBM in 2025, which is in line with consensus, supporting a Free Cash Flow (FCF) estimate of approximately $13 billion, marking a 7-9% year-over-year increase. These estimates do not take into account potential dilution from the pending acquisition of HCP, which is estimated to impact EPS and FCF by $0.15-$0.20 and $150-$200 million, respectively, or about 1.5%.
The analyst concluded by noting that IBM's stock has re-rated significantly over the past 15 months—up from 13 times to 17 times Unlevered Free Cash Flow (UFCF)—reflecting the company's improved execution and growth prospects, market rotation, and a favorable outlook for 2025. While the stock remains a solid defensive growth name with a 2.9% dividend yield, it is considered to be somewhat overextended ahead of the earnings report and more attractive on potential weakness.
In other recent news, IBM has significantly bolstered its asset management capabilities with the acquisition of Prescinto, a provider of asset performance management solutions. This strategic move aims to enhance IBM's Maximo Application Suite with advanced analytics and AI-driven automation for renewable energy operations.
IBM has also made significant strides in quantum computing, with the installation of the IBM Quantum (NASDAQ:QMCO) Heron processor resulting in substantial performance enhancements. Furthermore, IBM's recent acquisitions of Kubecost and Accelalpha are expected to expand its hybrid cloud cost management capabilities and enhance its Oracle (NYSE:ORCL) consulting capabilities, respectively.
Evercore ISI has reaffirmed its Outperform rating on IBM shares, signaling potential stabilization within the consulting market. The company has also been active in strategic collaborations, notably with NASA and Oak Ridge National Laboratory, to launch a new open-source AI model for climate forecasting.
InvestingPro Insights
IBM's recent performance and future outlook align closely with several key metrics and insights from InvestingPro. The company's stock has shown remarkable strength, with a 73.99% price total return over the past year and a 46.43% return year-to-date. This performance supports Stifel's observation of IBM's significant re-rating over the past 15 months.
InvestingPro Tips highlight that IBM is trading near its 52-week high, with its current price at 98.14% of the 52-week high. This aligns with Stifel's assessment that the stock may be somewhat overextended ahead of the earnings report. Additionally, IBM's P/E ratio of 25.37 and Price / Book ratio of 8.93 suggest the stock is trading at a premium, which could be attributed to its improved execution and growth prospects as noted by Stifel.
The company's dividend yield of 2.87% closely matches Stifel's mentioned 2.9%, underlining IBM's appeal as a defensive growth stock. Furthermore, IBM has maintained dividend payments for 54 consecutive years and has raised its dividend for 28 consecutive years, demonstrating its commitment to shareholder returns.
For investors seeking more comprehensive analysis, InvestingPro offers 12 additional tips for IBM, providing a deeper understanding of the company's financial health and market position.
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