IBM @ DOW

IBM (IBM)

190,99 USD 
-2,31% | -4,51 
 06/08/2013 22:00





1:00 pm
Aug 6, 2013

MARKETS

IBM’s Downgrade Weighs on Dow

By Steven Russolillo

Reuters

A downbeat take on IBM'sIBM -2.31% future is weighing on the tech giant’s shares and is dragging the broad market to its worst decline in more than a month.

Weak mainframe demand and fierce competition in software leave IBM’s existing businesses “effectively in decline,” Credit Suisse analyst Kulbinder Garcha said in a note to clients. Some valuation metrics also suggest the company trades at a hefty premium to its peers, Garcha said, while downgrading his IBM rating to underperform from neutral and slashing his price target to $175 from $200.

Shares recently fell $4.31, or 2.2%, to $191.21. The stock was flat this year through Monday’s close.

IBM, a Dow component, is also weighing on the overall market. Big Blue accounts for about 33 points, or roughly 1/3, of the Dow’s 105-point decline as of midday Tuesday.

The Dow is a price-weighted index, meaning the bigger the stock price, the larger the sway for a particular component. That is different from most other indexes, such as the S&P 500, which are weighted by its components’ market capitalizations. IBM currently holds the biggest weighting in the Dow, making up more than 10% of the index, according to S&P Dow Jones Indices. So when IBM moves, the Dow typically responds.

The latest downgrade on IBM shares comes at a time when Wall Street has relatively mixed views about the tech company’s short-term future. Some 16 of the 29 analysts that cover IBM have hold-related ratings on the stock, according to FactSet, a relatively high proportion considering the fact that Wall Streeters are generally a bullish bunch.

On Tuesday, Credit Suisse painted a relatively bleak future for what’s to come for IBM. About 34% of IBM’s gross profits come from hardware and software tied to older mainframe and Unix architectures, which have less room to grow now than they previously did.

As the chart below shows, IBM trades at a premium to many of its peers. Garcha said the company trades a 21.5 times free cash flow this year and 15.9 times expected free cash flow next year, which respectively represent 59% and 35% premiums to large-cap tech stocks. IBM is more richly valued than the likes Hewlett-Packard Co., Microsoft Corp. and Apple Inc., among others, according to this metric.

The rating cut adds pressure to IBM days after it said the SEC was eyeing how it reports cloud revenue.

“While we commend IBM’s operating performance in recent years, future organic growth will be challenging,” Garcha said. “We are also concerned by deteriorating free cash flow and a less effective mix up to software revenue.”