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We reiterate our Neutral recommendation on International Business Machines Corp. (IBM - Analyst Report) primarily due to its sluggish top-line performance over the last two quarters. Moreover, tepid growth in the services segment and continued decline in its hardware revenues also keeps us cautious on the stock.  

We believe increasing volatility in the outsourcing business is expected to impact IBM’s revenue and earnings power in the near term. The company could miss revenue targets and top-line growth may decelerate going forward due to the reduction in long-term signings. Moreover, increasing competition from Dell , Oracle (ORCL - Analyst Report), Hewlett-Packard (HPQ - Analyst Report), EMC (EMC - Analyst Report) and NetApp (NTAP - Snapshot Report) in the hardware segment is a cause of concern going forward.

IBM’s strong market share and growth in the enterprise segment make it dependent on enterprise and government IT spending patterns. Therefore, the company’s results closely follow the industry trends. As government spending contributes a significant portion of IBM’s top line, we believe any decline in IT spending does not bode well for the company going forward.

Nonetheless, we believe that IBM remains well positioned for long-term growth based on its four key growth initiatives: smarter planet, growth markets, business analytics and cloud computing, which are expected to deliver at least $50 billion in revenues by fiscal 2015. Further, IBM’s strong product pipeline, expansion into emerging markets and continuous acquisitions will help it to achieve this target going forward.

Moreover, IBM’s restructuring efforts are making headway, resulting in an improved bottom line. Further, the combination of a better business mix, improving operating leverage through productivity gains and increased investment in growth opportunities will augment growth in 2012 and beyond.

We also remain positive on the company’s growing profit margins coupled with strong cash flow generating abilities. The company’s effort to return $20 billion in the form of dividends to its shareholders over the next five years is also commendable. Additionally, strong cash flow abilities give IBM the financial flexibility required for strategic investments in the changing business environment. Considering the company’s liquidity and emphasis on profitability, we believe IBM’s solid growth rates may be sustainable.

Currently, IBM has a Zacks #3 Rank (Hold).

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