Here’s what Wall Street is saying about IBM ahead of earnings

IBM (IBM) is scheduled to report results of its fiscal third quarter after the market close on October 23, with a conference call scheduled for 5:00 pm ET. What to watch for:

GUIDANCE: Along with its last report, IBM reiterated its FY24 constant currency revenue growth view of mid-single digits. Analysts expect the company to report FY24 revenue of $63.26B, according to First Call. Meanwhile, IBM said on its quarterly call at the time that it expects Q3 revenue growth consistent with the full year of mid-single digits, with Wall Street expecting Q3 revenue of $15.07B.

SETTLEMENT CHARGE: In September, IBM disclosed that it and State Street (STT) Global Advisors Trust Company, as independent fiduciary of the IBM Personal Pension Plan, entered into a commitment agreement with The Prudential Insurance Company of America (PRU) under which the Plan will purchase a nonparticipating single premium group annuity contract that will transfer to Prudential approximately $6B of the Plan’s defined benefit pension obligations related to certain pension benefits that began to be paid prior to 2016. The purchase of the group annuity contract closed on September 11, 2024. The contract covers approximately 32,000 Plan participants and beneficiaries. Under the group annuity contract, Prudential has made an irrevocable commitment, and will be solely responsible, to pay the pension benefits of each Transferred Participant that are due on and after January 1, 2025. The transaction will result in no changes to the amount of benefits payable to the Transferred Participants. The purchase of the group annuity contract was funded directly by assets of the Plan and required no cash contribution from the company.

As a result of the transaction, the company expects to recognize a one-time non-cash pre-tax pension settlement charge of approximately $2.7B ($2B net of tax) in the third quarter of 2024. The actual charge will depend on finalization of the actuarial and other assumptions. The pre-tax charge was not included in the GAAP forward-looking information released on July 24, 2024, the company said at the time.

PRICE TARGET INCREASES: Over the course of this month, multiple securities firms have increased their price targets on IBM ahead of the company’s quarterly report. Two weeks ago, RBC Capital raised its target on IBM to $250 from $211 and maintained an Outperform rating on the shares, saying that sentiment has improved throughout the quarter, and the firm continues to see increasing thematic inbounds in addition to free cash flow support. The firm added that it continues to look for greater software traction, particularly from Red Hat, which the management expects to re-accelerate in the second half of the year as the first half strength was largely driven by better-than-expected infrastructure performance late in the refresh cycle as well as GenAI supporting consulting.

A week later, Stifel raised the firm’s price target on IBM to $246 from $205 and kept a Buy rating on the shares. The firm notes that Q3 is seasonally weak and believes “modest” EPS outperformance is more likely than revenue, the analyst tells investors in a research note. The setup for 2025 remains positive, and the stock remains a solid defensive growth name with a 2.9% dividend yield, though it feels a little extended going into report and is more interesting on the weakness, Stifel said.

Late last week, Morgan Stanley raised the firm’s price target on IBM to $217 from $182 and affirmed an Equal Weight rating on the shares. The firm notes that its new $217 target implies 7% downside, but it expects IBM to trade between its base and bull cases in the near-term, as Q3 results and Q4 guidance are “likely to meet or slightly beat” Street estimates. The firm, which doesn’t see much that is likely to derail IBM’s momentum at Q3 earnings, thinks Redhat decelerating is the potential risk in Q3, the analyst added in a preview note.

Additionally, Jefferies earlier this week raised the firm’s price target on IBM to $245 from $200 and keeps a Hold rating on the shares, saying that IBM has been a top performing stock in software year-tp-date “despite a marginal change in fundamentals.” However, the firm says that with low growth expectations of 4% this year, IBM is one of the few stories with expected acceleration into 2025. For the stock to “grind higher,” the company’s software needs to continue outperforming driven by Red Hat, consulting needs to rebound after two soft quarters, and artificial intelligence contribution needs to pick up, adds Jefferies.