Stifel Lowers IBM's 2015 Earnings Estimates

David Grossman of Stifel on Monday maintained a Buy rating on International Business Machines Corp. (NYSE: IBM) despite lowering the company's 2015 earnings per share estimates to $15.17 from a previous $16.00 estimate.

Grossman notes there are four factors affecting IBM's Software business which include: a shift in how the company sells its software bundle (ELA's), weakness in in its hardware business, product issues and cyclical demand issues.

“In our view, the first is the most meaningful but strategically necessary,” Grossman wrote. “Headwinds from the hardware business should abate as 2015 progresses and product issues are being addressed; the cyclical issues are harder to predict, but comparisons get much easier in 2015, particularly in the second half.”

Grossman assumes IBM will grow at a 1.5 percent constant currency rate (excluding divestitures) and will see a 50 basis point decline in pretax margins, a 110 basis points higher tax rate and a 5 to 6 percent share reduction.

The analyst also discloses that the impact on foreign exchange rates to EPS can not be estimated at this time but it does hold the potential to be “meaningful” that could lead to further downward estimate revisions.

However, the company will generate approximately $13.3 billion in free cash flow which will be sufficient to fund $6.6 billion in share repurchases and $4.2 billion in dividends while maintaining sufficient cash to undertake $2.5 billion in merger and acquisition activities.