Analysts trim 2010 rev view for IBM; shares fall

BANGALORE, INDIA: Several brokerages trimmed their 2010 revenue estimates for IBM amid concerns about disappointing services contracts, and shares of the technology services company fell more than 5 percent.

Late Monday IBM posted mixed quarterly results, reporting a decline in new technology services contracts in the second quarter, and blamed currency rates for the cut in revenue.

"We have some concerns about the growth of Global Technology Services, given weak revenue growth in the first half of 2010 and weak short-term signings," BMO Capital Markets said, forecasting modest growth for the unit in the second half of this year.

BMO cut its price target on the stock to $145 from $147.

The second straight quarterly decline at IBM, due mainly to a very poor performance in outsourcing, indicates that corporate clients remain cautious, especially in Europe, analysts at Societe Generale said.

Analysts at J.P. Morgan Securities said weakness in the services contracts may prompt investors to question broader IT spending patterns, but added that they do not believe signings are a good predictor of future revenue growth.

"The ongoing debate likely will be over the services signings trend-line as delays in long-term deals can be associated with macro soft patches," J.P. Morgan analysts said.

Currency-related concerns could also put pressure on shares in the near term, they added, as they cut their fiscal 2010 revenue estimate for IBM to $98.87 billion from $101.03 billion.

However, IBM's diverse model should benefit from sturdy software revenues and the potential thrust from pending server refreshes, J.P. Morgan analysts said, and raised their price target on the stock by $2 to $144.50.

Ahead of today's changes, the stock's mean price target was $143.93, according to StarMine data. This suggests analysts expect IBM shares to surge 16 percent in the next 12 months from current levels.

While the quarterly results may have disappointed investors, several analysts expect prospects for IBM to improve by the fourth quarter with new product cycles and saw the results as a modestly positive indicator for IT spending.

Sixteen analysts rate IBM shares a "buy" or its equivalent rating, seven rate it a "hold," while one rates it a "sell," StarMine data shows.

According to analysts at BofA Merrill Lynch, the two percent revenue growth IBM recorded in the second quarter is an indication of a slight recovery in overall IT spending.

Janney Capital analysts echoed this view. "IBM's software results indicate recovery, though a modest one, for software and primarily by its enterprise customer base," they said.

Analysts tweaked up their 2010 profit view, to reflect the company's raised earnings outlook of "at least $11.25 per share," up from "at least $11.20".

Shares of IBM were trading down $5.06 to $124.73 in morning trade on New York Stock Exchange.

IBM shares have fallen about 2 percent over the past quarter as investors focused on technology companies such as Apple Inc and VMware Inc which are enjoying double-digit percentage revenue growth.