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Credit Suisse Downgrades IBM, Thinks Shares Will Fall To $175

Aug 6, 2013, 21:40 IST

IBMIBM CEO Ginny Rometty

Credit Suisse today downgraded IBM stock to an "underperform" rating, which amounts to a recommendation to sell. It predicts the stock will fall to $175.

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The stock is down about 2% to $191 thanks to the downgrade.

Credit Suisse analyst Kulbinder Garcha wrote in a research report:

Organically we believe IBM is effectively in decline ... we estimate that overall IBM core organic growth will be -1.8% for 2013, and that software will grow at 1.9%. ... To be clear, we believe the company will deliver on the $20 EPS roadmap; despite this, we downgrade to an Underperform.

He's referring to IBM's promise to deliver $20 earnings per share by 2015, a program internally called Roadmap 2015. Some IBM employees have told Business Insider that this promise is causing IBM to take drastic measures to control or reduce costs and that some employees call the plan "Roadkill 2015."

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For instance, IBM is laying off thousands of employees. Plus, IBM told some employees in its hardware divisions that they would have to take a week off of work with reduced pay, Bloomberg's Sarah Frier reports. Executives in the division will not be paid during the week at all, Frier reports.

The furlough is an attempt to stop margins in the hardware business from a free fall. Sales in the Systems and Technology unit slid 11% to $3.76 billion in the second quarter compared to the year earlier quarter. Gross margins declined 12%.

Garcha says he believes "The current exclusive focus on 'EPS based valuation is distorting."

We reached out to IBM for comment and will update if we hear back.

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