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What Led RBC to Raise IBM’s Price Target?

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RBC raised IBM’s price target to $155

We’ve already looked at the factors that led Morgan Stanley (MS) to improve its rating and outlook for IBM (IBM). In April 2016, Amit Daryanani, an analyst at RBC Capital, raised IBM’s price target from $135 to $155 and maintained its “sector perform” rating.

Reorganization of IBM’s operating segments should increase visibility

On March 31, 2016, IBM issued a press release announcing the restructuring of its operating segments. Industry analysts, including Daryanani, believe that IBM’s newly reporting segments will provide much-needed revenue disclosure.

With the company’s operating segment reclassification, software revenue reporting will be affected primarily. This is because subsegments that previously made up the former software segment will now be comprised of the following:

  1. Cognitive Solutions: This includes Solutions and Transaction Processing Software. It’s similar to IBM’s former software segment and includes analytics, security, and Watson. Cognitive Solutions is IBM’s most profitable operating segment. The segment’s gross margin was 85.1% in 2015, and pre-tax margin was 36.1%. On April 6, 2016, IBM and German-based (EWG) SAP (SAP) announced a partnership to develop cognitive and cloud-based solutions for customers of both companies.
  2. Technology Services & Cloud Platforms: This includes the former Global Technology segment revenue and Integration Software. This division will provide updates on growth in the cloud space, which is one of IBM’s priority areas.
  3. Systems: This combines hardware and software associated with hardware OS (operating systems) and BIOS (basic input/output system).

The restructuring of IBM’s operating segments will provide more visibility. This led research house RBC to raise the price target for IBM stock. In late 2015, Microsoft (MSFT) also announced changes in its financial reporting segments. The changes were in line with its “mobile first–cloud first” strategy.

Investors who want to gain exposure to Microsoft could consider investing in the SPDR S&P 500 ETF (SPY). SPY invests ~2.4% of its holdings in Microsoft. It also has an ~8% exposure to the application software sector.

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