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IBM is a troubled company that has been resorting to financial engineering rather than intrinsic growth – and analysts are taking notice.PHILIPPE WOJAZER/Reuters

When International Business Machines Corp. sputters, it is only natural to see the blue-chip stock as a bargain that will reward long-term investors. It's sputtering now – but IBM is no bargain.

The shares fell 6.4 per cent on Thursday, hitting a two-year low, after the tech behemoth reported disappointing third-quarter sales figures on Wednesday evening.

Big Blue has been down before, of course, and each time it has rallied back to new heights, including earlier this year when the shares hit a record $216 (U.S.). And over the past 20 years, it has been hard to ignore IBM's ability to adapt to shifting technology: The share price has risen more than 1,600 per cent, or six times the return of the S&P 500.

The stock has some enticing elements to it. The price-to-earnings ratio is just 11, or its lowest valuation since the start of the financial crisis in 2008; per-share earnings have been rising at a nice clip over the past three quarters; and Warren Buffett's Berkshire Hathaway Inc. is still the top investor in the company, with more than 68 million shares.

But this doesn't add up to a compelling buy: IBM is a troubled company that has been resorting to financial engineering rather than intrinsic growth – and analysts are taking notice.

"The poor near-term results and questions raised about farther-out earnings power can't be ignored," said Steven Milunovich, an analyst at UBS, after pulling his "buy" recommendation on the stock and downgrading it to "neutral."

"Normally we would wait out mediocre results in preparation for the bounce back, but there are too many questions this time."

At Credit Suisse, Kulbinder Garcha cut his target price to $160 from $175 and maintained an "underperform" recommendation, warning "the issues facing the company could be more than temporary."

The third-quarter results were part of a trend. Sales have fallen for six straight quarters, most recently by 4 per cent over the past year, and they have missed estimates in eight of the past 10 quarters.

IBM's computer hardware business is now losing money after sales fell 17 per cent in the quarter. Sales in so-called growth markets, which include China, are also tumbling – partly because of lower spending within these economies, but also because IBM, by its own admission, has been messing up. In many areas of software, meanwhile, IBM is losing market share to the likes of Microsoft Corp. and Oracle Corp.

The company is moving into faster-growing areas of the technology space, including cloud computing, but the move contributes to another problem: IBM has too many lines of business, translating into inefficient research and development and high management costs.

These challenges may be tempting to overlook given that earnings have remained relatively robust and topped expectations in the third quarter.

But IBM's earnings are the result of clever tinkering rather than a strong underlying business. The company has been buying back its own shares aggressively – $12-billion worth in 2012 alone – to drive earnings on a per-share basis. The number of outstanding shares has fallen more than 30 per cent over the past decade.

Some investors like buybacks as a form of shareholder returns, especially when the shares are perceived to be undervalued. In this case, though, buybacks make IBM's earnings growth look better than it actually is and they highlight a lack of growth opportunities.

The company is also doing everything it can to cut costs, including trimming its work force by 3,330 North American employees in the second quarter.

But cost-cutting, like buybacks, only goes so far. Mr. Garcha believes that IBM is now "running out of levers" to deliver earnings. And Mr. Milunovich says that company credibility among investors is at a low.

Yes, IBM is highly profitable and it has rewarded intrepid investors before. But these are early days in the company's latest stumble.