The catalyst for her move: IBM’s recent announcement of a $15 billion stock repurchase plan. In announcing the buyback, IBM said the repurchase plan could boost 2007 EPS growth from 10%-12%, keeping with its long-term profit guidance, to 12%-14%.
“Less than a week after we downgraded IBM on weak U.S. spending and no near-term catalysts, IBM changed the rules by initiating its largest value creation moves in years, forcing us to re-think our change,” Conigliaro wrote in a research note this morning.
As a result of IBM’s accelerated buyback program likely adding at least 8 cents in 2007 and over 20 cents in 2008 even before the coming tailwind on pension expense reduction, adding another 25 cents-plus to 2008 with smaller increments to earnings in future years, we are moving our rating back to Buy from Neutral. IBM is not particularly exciting but 13% and 16% earnings gains in 2007 and 2008, respectively, should keep a bid to the stock.
Conigliaro notes that IBM will hold a meeting with analysts on May 17; she expects the company to provide details on its growth prospects. Meanwhile, she has raised her 2007 EPS estimate to $6.85 from $6.76; for 2008 she goes to $7.95 from $7.47. Her price target on the stock is $120.
In pre-market trading, IBM this morning was up 72 cents at $104.01.
