The shares of IBM (IBM) - Get Report are rising after Morgan Stanley upgraded the stock to Overweight, saying that the favorable transformation of the company's business is being underappreciated by the market.

TRANSFORMATION UNDERWAY: Investors are failing to appreciate IBM's increased emphasis on analytics and the cloud, wrote Morgan Stanley analyst Katy Huberty, who upgraded the stock to Overweight from Equal Weight. IBM's Strategic Imperatives unit - which includes its data, cloud and engagement businesses - grew at a 17% rate last year and generated 35% of the company's revenue, the analyst stated. The unit 's strong rebound was spurred by its faster than expected transition to solutions with higher growth rates and greater value, Huberty reported. Moreover, the analyst believes that the 4% decline in IBM's revenue, excluding currency fluctuations, last year will probably be a low water mark. Huberty estimates that IBM's revenue growth should be flat in 2018 before increasing in 2019. While the consensus outlook calls for IBM's free cash flow to drop 5% in each of the next two years, Huberty expects the company's free cash flow to rise 2% over the same period. She thinks that IBM is undervalued and raised her price target on the stock to $140 from $135.

WHAT'S NOTABLE: IBM's Watson Health unit announced this morning that it plans to acquire Truven Health Analytics, a provider of cloud-based healthcare data, analytics and insights, for $2.6B. Truven has more than 8,500 clients, IBM reported.

PRICE ACTION: In late morning trading, IBM rose 5.4% to $132.80.

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