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Why IBM Stock Dropped Nearly 6% This Morning

By Rich Smith – Apr 15, 2020 at 2:46PM

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Three Wall Street price targets on IBM go in only one direction: down.

What happened

It's Wednesday and the stock market is in the toilet. The S&P 500 is down more than 2%. Part of the reason for that is that one of America's best-known tech stocks, International Business Machines (IBM -0.57%), is down 4.5% as of 1:30 p.m. EDT.

And of course it is.

3 red airplanes leaving contrails pointing down

Image source: Getty Images.

So what

As you've probably heard by now, IBM got a new CEO last week, when Arvind Krishna took over the corner office from his predecessor Virginia Rometty. With IBM stock having underperformed the S&P 500 over the past year, you might think investors would take a change in leadership as a positive development. Unfortunately, for one class of investor in particular, so far the opposite seems to be happening.

According to StreetInsider.com, no fewer than three separate analysts cut their price targets on IBM stock over the past two days, with J.P. Morgan reducing its target to $128 a share, and Bernstein and Wells Fargo even more pessimistic with targets of $125 and $120, respectively.

Today, TheFly.com tells us a fourth analyst has chimed in and, although Credit Suisse's new price target is significantly higher than its peers' ($150 a share for IBM), it's still a cut -- and a 13% reduction from CS's previous price target of $173.

Now what

Credit Suisse explained its cut by saying it wants to wait and see what Krishna has to say about how he will navigate the COVID-19-related recession, and what his "longer-term vision and strategy for the company" is thereafter. Pending this, CS is maintaining its outperform call on the stock.

And while CS may be an outlier with its higher price target, I cannot say that it's clearly wrong. At a recent price-to-earnings (P/E) ratio of just 11.5 times earnings, there's no denying IBM stock looks cheap on the surface -- certainly cheaper than the average S&P stock, which fetches a P/E closer to 20.9 times earnings. IBM's 5.2% dividend yield certainly looks attractive as well -- at more than twice the average yield on the S&P 500.  

If Krishna says the right things when IBM reports its earnings next week, this stock might even become a buy.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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