Bernstein's Sacconaghi Weighs in on IBM's (IBM) SEC Investigation

Bernstein analyst Toni Sacconaghi weighed in on IBM (NYSE: IBM) after the company revealed that the SEC is conducting an investigation "relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., U.K. and Ireland."

Sacconaghi thinks the investigation is formal but notes this is not first time that the SEC has investigated IBM.

Sacconaghi offered the following quick thoughts:

• We do not know if this is an inquiry or a formal investigation by the SEC. We suspect it is formal. Unlike an informal inquiry, a formal SEC investigation empowers the SEC to compel witnesses by subpoena to testify and produce books, records, and other relevant documents. It is generally a more serious level of investigation into a company, and often follows a preliminary informal investigation.
• We don't know how broad the investigation is. We suspect that it is relatively narrow. We note that the 10Q states that the investigation will investigate "certain transactions" – we suspect these words were chosen carefully. That said, investigations can and often do broaden in scope.
• This is not the first time that the SEC has investigated IBM. In June 2003, the SEC launched a formal investigation into revenue recognition, causing much alarm among investors. In 2005/2006, the SEC investigated IBM around equity compensation grants. In 2013, IBM was investigated for revenue recognition of its cloud revenues. None of the prior investigations led to a materially adverse resolution.
• We assembled a list of SEC case studies back in 2003, when IBM was first investigated about revenue recognition policies. While dated, the take-aways were insightful then, and are likely still helpful. In short, odds suggest that the investigation will be unlikely to materially affect the company, or its stock price on a longer-term basis.

The firm maintained a Market Perform rating and price target of $140 on IBM.

For an analyst ratings summary and ratings history on IBM click here. For more ratings news on IBM click here.

Shares of IBM closed at $143.66 yesterday.

You May Also Be Interested In

• Singularity Future Technology closes $5M registered direct offering
• Rosenblatt Reiterates Buy Rating on Super Micro Computer (SMCI)
• Sky Century Investment responds to OTC Markets stock promotion inquiry