IBM downgraded as UBS cuts estimates on lower IT spending, elevated valuation

• IBM (NYSE:IBM) is being downgraded to sell from neutral at UBS, as the investment firm is lowering earnings estimates as a result of the Kyndryl spin-off and an "elevated valuation that leaves the shares vulnerable over the next 12 months."
• Analyst David Vogt also lowered his price target to $124, down from $136, citing the spin-off, but also pointing out that IBM (IBM) is trading at more than 14 times trailing 12 months earnings, more than 3 times its trailing 3 and 5-year average, "indicating the [market] is underwriting [management's] mid-single-digit target despite a history of execution issues."
• Vogt also noted that he believes the market is pricing in 2022 and 2023 earnings estimates that are 10% higher than his estimates and the stock has benefited from a rotation from growth to value, which creates risk.
• "While some expansion was to be expected post the spin from the ~10x long-term average given an 'optically' better PF rev outlook and margin profile, if [multiples] mean revert to ~10x, shares could fall 15-20%, below our base case," Vogt added.
• IBM (IBM) shares are down more than 2% to $131.88 on back of the downgrade but have gained nearly 10% over the past year.
• Going forward, Vogt said IBM (IBM) is likely to grow organic revenue in 2022 and 2023 at 3.4% and 3.1%, below management's mid-single digit target. Roughly 50% of the Armonk, New York-based company's revenue is facing "secular headwinds and is unlikely to grow long term," Vogt added. He also pointed out that Red Hat and Consulting are likely to see decelerating growth and the reinvestment opportunity is hurt by the company's $6 billion spend on its dividend, or roughly 50% of IBM's (IBM) expected free cash flow generation over the next three years.

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