Worried about recession? Then maybe you want to take a fresh look at
That advice comes courtesy of Morgan Stanley analyst Erik Woodring. On Thursday, he boosted the firm’s rating on IBM (ticker: IBM) shares to Overweight from Equal Weight, with a new price target of $150, up from $147. IBM shares on Thursday were recently up 1% to $127.43.
In particular, Woodring sees the stock as an excellent place to hide from what his firm sees as increasing potential for a U.S. economic downturn.
Woodring is “increasingly concerned” that macroeconomic headwinds could pressure both profits and earnings multiples for enterprise hardware plays in coming quarters, he writes. Overall, Morgan Stanley’s economics team sees “rising risk” of a U.S. recession and expects deceleration in the purchasing managers index, or PMI, a measure of economic activity in the manufacturer and service sectors.
Woodring adds that checks with resellers have found that “hardware budgets are about to be cut as companies maneuver geopolitical uncertainty and rising costs.”
In Woodring’s view, IBM is better-positioned than most enterprise hardware companies to weather a macroeconomic storm. For one thing, he notes that only 20% of IBM’s revenue is tied directly to hardware and related software, and more than half of its revenue are recurring. Historically IBM shares have been negatively correlated with PMI changes—in other words, the shares tend to perform better when economic growth is slowing, he adds.
In addition, IBM launched a new generation of mainframe computers this month, which should drive growth in its hardware business, giving him confidence that “the business is positioned to outperform through the rest of this year.”
As Barron’s outlined in a recent cover story, IBM CEO Arvind Krishna has been engineering a turnaround at the technology giant, shedding low-margin, low growth assets, and focusing the company on cloud computing and artificial intelligence applications.
“The result is a stronger long-term growth outlook, though investors still question whether mid single-digit long-term revenue growth is achievable,” Woodring writes. “However, we do see green shoots of improving customer sentiment and spending plans …While it is too early to call a clear inflection, these data points bear watching.”
Write to Eric J. Savitz at [email protected]