Shares of International Business Machines Corp. (IBM) continue to gain 2.1% on Thursday afternoon after jumping nearly 3% in the latest trading session on a bullish research note from the Street. Analysts at RBC Capital Markets indicated that as the legacy tech giant is positioned to make a strong comeback after a rough 2017, investors are still undervaluing the stock. (See also: Blockchain Is IBM’s ‘Best Hope for Recovery’: UBS.)
RBC’s Amit Daryanani lifted his rating on IBM to outperform from sector perform, citing the stock’s inexpensive valuation. The analyst highlighted that the Armonk, N.Y.-based company is trading at 11 times its price-to-earnings ratio, with a 3% dividend yield that is “highly attractive.”
Revenue Growth Sets Up a Year of Outperformance
“We think IBM is an attractive large-cap value stock for investors in 2018 as the potential for revenue and margin stability should enable a re-rating,” Daryanani wrote in a note to clients Wednesday. “A return to gross margin stability coupled with revenue growth in 2018 should set-up the stock for a year of outperformance especially considering the depressed valuation.”
Last year, IBM saw its shares sink 8% compared to the S&P 500’s 19% return over the same period. As the company struggled to impress investors with its turnaround led by Chief Executive Officer (CEO) Ginni Rometty, the acclaimed billionaire Warren Buffet dumped nearly one third of his IBM shares.
The RBC analyst lifted his 12-month price target for IBM from $160 to $180, reflecting an approximate 11.3% upside from Wednesday afternoon at $161.73. “IBM represents the best mix of technology business in the enterprise segment,” said Daryanani. “We think IBM has cultivated the preeminent technology portfolio.”
RBC cited IBM’s “new mainframe cycle” for its System Z machines and the rise of hybrid IT spending as positive growth drivers for the tech titan in the new year. (See also: IBM to Gain on Strong Tailwind from Weak USD: CFO.)