Low Expectations Could Stoke IBM Upside

The new slimmed-down International Business Machines Corp. (IBM) reports its first full quarter since the Kyndryl Holdings Inc. (KD) spin-off after the close, with analysts forecasting a profit of $1.39 per-share on $13.85 billion in revenue. Neither stock has performed well since the Nov. 4 split-up, with KD cut in half while IBM is trading less than two points from the Nov. 3 close. Buying interest has been non-existent during this period, highlighting continued investor apathy.

Safe Haven in Tough Times?

However, IBM could outperform in a slowing economy or deep recession. Hardware budgets will decline but just 20% of the balance sheet is hardware-related after the spin-off while half of all revenues are recurring, through contracts and service agreements. Even the old tech behemoth was considered a good bet in tough times, historically trending in the opposite direction of the Purchasing Managers Index (PMI), a leading indicator for economic strength and weakness.

Morgan Stanley analyst Erik Woodring posted a $150 price target while upgrading the stock to ‘Overweight’ last week, noting the “result is a stronger long-term growth outlook, though investors still question whether mid-single-digit long-term revenue growth is achievable. However, we do see green shoots of improving customer sentiment and spending plans …While it is too early to call a clear inflection, these data points bear watching.”

Wall Street and Technical Outlook

Wall Street consensus stands at an apathetic ‘Hold’ rating based upon 7 ‘Buy’, 9 ‘Overweight’, and 11 ‘Hold’ recommendations. In addition, two analysts recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $115 to a Street-high $185 while the stock is set to open Tuesday’s session about $19 below the median $145 target. Sadly, these dismal ratings have barely budged in the last seven or eight years, perfectly in line with the multiyear downtrend.

IBM topped out in 2013 and entered a severe decline that has carved nine years of lower highs and lower lows. It hit an 11-year low in March 2020 and bounced, reversing at an 8-year down trendline in June 2021. The stock has traded near the midpoint of the 2020 trading range since that time while accumulation continues to slump near 2018 levels. The good news for bulls at this point: no one expects the company to beat earnings and raise guidance, improving odds for a pleasant surprise.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.