IBM Hits 4-Month High After Spin-off News

Dow component and perennial laggard International Business Machines Corp. (IBM) rallied to a 4-month high on Thursday after announcing it would accelerate its hybrid cloud growth strategy and spin off the rapidly-growing managed infrastructure services unit. The company also issued in-line Q3 2020 guidance, expecting to earn $2.58 per-share on $17.56 billion in revenue, with both metrics at or near consensus estimates.

IBM To Create Two Separate Entities

IBM will separate the Managed Infrastructure Services unit of its Global Technology Services division into a new public company, creating two separate entities, each with “strategic focus and flexibility to drive client and shareholder value”. The transaction will be executed as a tax-free spin-off to shareholders that’s expected to close by the end of 2021. The company said the long lead time is needed to meet SEC requirements, obtain tax guidance, and get final approval from the Board of Directors.

The company has suffered from slow growth and dull management since posting an all-time high in 2013 and has been one of the Dow’s worst performers since that time. The acquisition of Red Hat in October 2018 promised to accelerate the limp growth trajectory but chronic lethargy in the board room and executive chambers undermined bullish sentiment, triggering renewed selling pressure that dumped the stock to a 10-year low in March 2020.

Wall Street And Technical Outlook

Apathy best describes Wall Street consensus but that could change after today’s announcement. It’s now rated as a ‘Moderate Buy’, based upon 5 ‘Buy’, 6 ‘Hold’, and just one ‘Sell’ recommendation. Price targets currently range from a low of $115 to a street-high $155 while the stock is trading $7 below the $141 median target in Thursday’s U.S. session. Higher targets are likely but the deal isn’t expected to close for 15 months, potentially slowing the upgrade process.

IBM confirmed a breakdown through the 1999 high in the upper 130s during the first quarter selloff, establishing tough resistance in that price zone. The 50- and 200-month moving averages are narrowly-aligned at the same level, highlighting a formidable barrier that could restrict price action well into 2021. Even so, the news could generate sustained accumulation, rebuilding institutional support that abandoned this old school tech behemoth in the last decade.