IBM Gets Overweight Rating at Morgan Stanley

Investors in International Business Machines (IBM) are focusing on the impact of its acquisition of Red Hat and are missing the growth in the technology giant’s core business that’s coming at a time when peers are decelerating, Morgan Stanley said in a note on Thursday.

The investment bank resumed coverage on IBM at overweight and a $170 price target as the Armonk, NY-based company is in the “later innings of a transformation meant to return the company to growth and margin expansion,” said equity analyst Katy Huberty.

“While investor discussions center on the impact of Red Hat on both near-term and long-term results, we believe the market is missing the fact that IBM’s core business accelerated at a time when peers decelerated,” Huberty said.

The company’s shares were up 2.4% in afternoon trading on Thursday.

Earlier this month, IBM said second-quarter revenue in its cloud and cognitive software segment rose 3.2% to $5.6 billion, while global business services increased 0.5% to $4.2 billion. Global technology services revenue fell 6.7% to $6.8 billion while systems fell about 20% to $1.8 billion.

IBM closed its $34 billion Red Hat acquisition on July 9, and the company will provide an update to full-year expectations to reflect the deal on Friday.

“Our base case doesn’t credit IBM with planned Red Hat revenue synergies which could drive 33% potential upside in our $197 bull case valuation,” said Huberty. “Overlaying Red Hat adds another 60 (basis points) of revenue growth, leading to a 2% sustainable growth rate.”

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