Analyst: This Could Be Huge for IBM Stock
International Business Machines Corp. (NYSE:IBM) is on an acquisition spree and is venturing into some new and unexplored territories. One analyst now sees great value in IBM stock.
After having lost a big chunk of its value, IBM is back on a winning streak. “Big Blue” has made some promising acquisitions this year to reinvigorate its business. The latest of these was announced on Thursday.
IBM is buying healthcare analytics firm Truven Health Analytics. This acquisition will become part of IBM’s “Watson Health” unit, which acquired a number of similar companies in the healthcare analytics business last year.
Recall that earlier this month, IBM also made two different acquisitions in the online advertising and digital media business; one was German ad agency Aperto and the other was top U.S.-based digital agency Resource/Amirati.
Prior to those acquisitions, IBM also acquired cloud-based video streaming service Ustream in January.
At a cursory look, it seems like IBM has too many irons in the fire. But look closely and you’ll see the pattern here. All of these acquisitions have one thing in common. They are all part of IBM’s expansion strategy supplementing its “Strategic Imperatives” segment.
One analyst is now identifying this connection and foresees great value in it.
Morgan Stanley analyst Katy Huberty points out that IBM is transforming into a cloud-based analytics company. (Source: “Morgan Stanley Highlights ‘Valuation Disconnect’ in IBM (IBM), Upgrades Stock to ‘Buy’,” Street Insider, February 18, 2016.)
Huberty says that IBM’s Strategic Imperatives segment now accounts for 35% of IBM’s revenue and grew 17% in 2015, or 26% on constant currency basis. This segment includes three sub-units: data, cloud, and engagement solutions. The engagement unit further includes mobile and security solutions.
According to Huberty, the stellar double-digit growth reflects IBM’s faster-than-expected transformation to “higher growth and higher value solutions.”
“We believe IBM warrants a premium over other hardware companies that haven’t invested heavily to transform to new computing paradigms,” says Huberty. (Source: Ibid.)
The analyst estimates IBM to be undervalued at current levels. She believes that the market will soon realize this hidden value in IBM stock.
Huberty forecasts IBM’s revenue to stabilize in 2016 and then accelerate in 2017. She also forecasts the company’s free cash flows to improve in the second quarter of 2016.
She says, “These higher growth categories are undervalued based on our sum-of-the-parts (SOTP) analysis.” She continues, “We expect the valuation disconnect to correct with new disclosures (expected at IBM’s Feb 25th analyst day), stabilizing revenue trends this year (with acceleration in 2017+), and improving FCF (as early as 2H16).” (Source: Ibid.)
The Morgan Stanley analyst has upgraded IBM stock to an “Overweight” rating with a price target of $140.00. The stock is currently trading at nearly a six-percent discount to this price.