Big Boy Blue, come blow your horn, the sheep's in the meadow, the cow's in the corn.
Credit Suisse previewed Big Blue’s second-quarter results, due after market close on July 18. The firm expects IBM will record revenue of $25.35 billion (up 6.9% year over year) and EPS of $3.01 (up 14.9% year over year) versus Street expectations of $25.35 billion and $3.03, respectively. Software and Services should remain growth drivers: with strong end-market demand for software and services, Credit Suisse believes IBM will continue to deliver positive results within these segments.
Currently, the firm is modeling F11 Software revenues of $24.9 billion (up 11.8% year over year) and Global Services revenues of $58.9 billion (up 4.3% year over year). Given a strong software demand environment within middleware and continued traction with analytics/Netezza, Credit Suisse expects persistent growth within this high-margin segment (~35% PTI margins).
For Global Services, the firm expects a healthy demand for application outsourcing, as well as improving consulting and SI projects (following strong Accenture signings/revenues and Datamonitor trends). Systems and Technology will likely see fading cycles. After posting 69% and 41% growth in “System z” in the past two quarter, Credit Suisse expects the mainframe cycle to start to fade. “System p”, which benefitted from the POWER7 processor update last year, should see demand moderate. x86 servers, while benefitting from rising ASPs, could see units hamstrung as the Nehalem refresh continues to decelerate.
Storage segment demand remains strong but IBM’s positioning is likely to restrain growth. Here, Credit Suisse believes storage pure plays EMC (EMC) and NetApp (NTAP) will capture a disproportionate share of industry growth. As for valuation, with more than 50% of incremental EPS coming from M&A and buybacks over the next five years, Credit Suisse believes the quality of growth is somewhat low.
While shares trade at 12x the firm’s C12 EPS estimate, Credit Suisse believes shares do deserve to trade at a discount to the S&P. A blended average of P/E, DCF, and HOLT suggests a fair value in line with the current levels, and hence the firm’s neutral stance. Credit Suisse continues to favour EMC and NetApp for enterprise exposure, but would become more constructive below $150 or with increased evidence of robust organic growth.
IBM (IBM : NYSE : US$174.05), Net Change: -0.94, % Change: -0.54%, Volume: 4,939,191