Monday, February 7, 2011

IBM: fairly valued with a margin of safety

I believe International Business Machines ($IBM), at approximately $165/share is fairly valued with a margin of safety on a cash flow valuation basis.
$IBM is one of the largest information technology companies with an array of offerings including system hardware, infrastructure software, outsourcing, and systems integration services. The firm has operations in more than 170 countries, and generates about 65% of revenue from abroad.
I estimated the firm's WACC at 9.52% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
YearFCF $Millions
20003658
20018605
20028313
200310014
200410955
200511072
20069841
200710584
200814641
200917326
201016300
Average Annual Growth: approx. 21%
CAGR: approx. 16%
Consensus Forecast Industry 5-Year Growth: approx. 15% per year
Consensus Forecast Company 5-Year Growth: approx. 11% per year
Assuming the company achieves a lower 5-year growth rate of 9% per year, and assuming that after the next five years, the company achieves no growth or 0% growth per year forever:
Discounted Cash Flow Valuation
YearFCF $ Millions
016300
117767
219366
321109
423009
525080
Terminal Value287041
The firm's future cash flows, discounted at a WACC of 9.52%, give a present value for the entire firm (Debt + Equity) of $262,478 million. If the firm's fair value of debt is estimated at $30,000 million, then the fair value of the firm's equity could be $232,478 million.
$232,478 million / 1230 million outstanding shares is approximately $189 per share and a 20% margin of safety is $151. Assuming all else at $IBM meets my standard for good business, I'd buy it today for the long term at $151.

Sources 
Morningstar.com
ibm.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

No comments:

Post a Comment