Monday, February 7, 2011

IBM: Capstone Says Buy, $190 Price Target

Capstone Investments analyst Shebly Seyrafi late this afternoon initiated coverage of International Business Machines (IBM) with a Buy rating and a $190 price target, writing that the company is “very shareholder-focused,” with an emphasis on profit growth above all.

Seyrafi writes that IBM has recently set a goal to increase profit per share to $20 by 2015, from $11.52 per share last year (on a non-GAAP basis), which would be 11%. That’s entirely reasonable, he argues, given IBM in 2007 had set itself a goal of $11 per share by 2010, and beat that.

Seyrafi sees revenue growth in coming years propelled by greater exposure to developing markets, and by IBM’s deriving a greater proportion of revenue from sales of middleware software, which may comprise 60% of revenue by 2015, up from 42% today and just 28% in 2003. IBM’s position in both software and services is “strong,” he notes, with a lead in middleware in particular, at 32% market share.

IBM plans to spend $20 billion on M&A between now and 2015, and most of that is expected to be for software companies.

Seyrafi is estimating $105.3 billion in revenue this year, and $13.1 in EPS, versus the Street consensus for $104.5 billion and $13.08.

IBM shares today closed up 82 cents, half a point, at $164.82.

Seyrafi’s target is based on a discounted cash flow model, using an 11% WACC and a 3.2% terminal growth rate.

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