Morgan Stanley (NYSE:MS) analyst Erik Woodring upgraded IBM (NYSE:IBM) to Overweight from Equal Weight with a price target of $150.00 per share, up from $147.00.
The analyst argues that IBM offers a shelter for investors looking to “hide” amid growing macro risks. He reminds investors that IBM is negatively correlated with PMIs and historical late-cycle outperformance.
“While a recession isn't yet the base case, our US Economics team sees rising risk of a US recession and forecasts decelerating PMIs, indicative of a late cycle when IT Hardware stocks typically underperform the S&P 500. What's more, our recent AlphaWise CIO Survey and VAR checks suggest hardware budgets are about to be cut as companies maneuver geopolitical uncertainty and rising costs,” Woodring said in a client note.
Woodring reiterates that the IBM upgrade is a relative call as the company is well-positioned to “weather macro storm.”
“IBM is likely to outperform in a scenario of IT hardware budget cuts, with over half of revenue derived from more defensive recurring revenue streams and only 20% of IBM's revenue directly tied to hardware and related OS revenue. In fact, IBM shares have historically been negatively correlated with PMIs and shares typically outperform our IT Hardware coverage late cycle on a combination of lower earnings risk and far less multiple compression. These factors combined with the fact that IBM will be entering mainframe and ELA cycles in 2H give us confidence the business is positioned to outperform through the rest of this year,” the analyst added.
BofA analyst Wamsi Mohan is also bullish on IBM although he lowered estimates ahead of the company’s Q1 earnings report that is due next Tuesday.
“Investors are looking for IBM to report consistent quarters of revenue beats, which we believe is achievable (provided no macroeconomic shock to global economies). Reiterate Buy on expectations that the company will achieve its mid-term rev/FCF targets,” Mohan wrote in a memo.
IBM stock price is up nearly 2% in pre-open Thursday.
By Senad Karaahmetovic