What happened
Investors in International Business Machines (NYSE: IBM) are feeling "big blue" today -- and not in a good way. As of 10:10 a.m. ET, shares of the computing giant are down 4.1%.
You can blame another three-letter company -- UBS -- for that.
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So what
Swiss megabank UBS downgraded IBM stock to a sell rating this morning, you see, and cut its price target on the tech giant to $124 per share -- $5 below where it trades even after this morning's sell-off, which implies there may be even more pain to come.
Citing lower earnings estimates and "an elevated valuation" (although truth be told, IBM only costs about 24 times trailing earnings, considerably cheaper than the S&P 500 as a whole), UBS sees the shares as "vulnerable over the next 12 months."
Now what
UBS estimates that IBM will earn only about $9.47, pro forma, per share this year, well below the stock's $10.30 consensus earnings target on Wall Street. As the analyst explains in today's note on StreetInsider.com, when valued on these forward earnings, the stock's 14 times forward P/E ratio (which, remember, is different from the trailing P/E ratio) has IBM trading at least three points above "its trailing 3- and 5-year average" valuation "despite a history of execution issues."
In the analyst's opinion, given IBM's history, the stock doesn't deserve this premium valuation, and doesn't deserve the benefit of the doubt about it meeting or beating consensus estimates this year. Worse, UBS predicts that once investors realize this and resume valuing IBM stock at closer to 10 times forward earnings, rather than 14 times, the stock could fall as much as 20%.
If the analyst is right about that, then IBM's sliding stock price may not stop at today's 4% decline, or even at the further 4% implied by even UBS's new price target. A 20% slide would take IBM stock all the way down to $107.
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