The analyst now rates the stock in-line compared to a previous outperform rating, and he reduced his price target for IBM shares to $145 from $160.
The company’s earnings forecast for the fourth quarter might be overly optimistic "given the slower enterprise backdrop highlighted by IBM itself, in addition to comments from peers such as Cisco, Dell, etc." Daryanani wrote in a report.
IBM’s strength in its mainframe computer business likely won’t be enough to offset that, he said. In its third-quarter earnings statement, IBM predicted earnings per share of at least $10.58 for all of 2019 and adjusted earnings of at least $12.80. IBM expects free cash flow of about $12 billion.
"We see macro headwinds combined with a difficult first half of 2020 setup that warrants incremental caution, especially given the current net leverage," Daryanani wrote. IBM’s leverage totaled 7.28 in the third quarter, according to CSIMarket.
IBM acquired open-source software company Red Hat last year. The merger leaves IBM "well positioned to enable the shift to the hybrid era for large enterprises," Daryanani wrote. But that doesn’t overcome his concerns.
Meanwhile, analysts' forecasts of organic revenue growth of 1% to 2% this year, excluding Red Hat, may be overly generous in light of the pessimism from IBM’s peers, Daryanani said.
IBM shares fell 1.07% in trading Monday to $135.23. The stock has risen 11.36% over the past 52 weeks.