Current Price: ~ $197/share
Projected Yield: ~ 1.52%
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.
Estimated WACC for the firm today is 6.86% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year

FCF
$Millions

2002

8313

2003

10014

2004

10955

2005

11072

2006

9841

2007

10584

2008

14641

2009

17326

2010

15364

2011

15738

Average Annual Growth FCF: ~ 8%
CAGR FCF: ~ 7%
Consensus Forecast Industry 5Year Growth: ~ 13% per year
Consensus Forecast Company 5Year Growth: ~ 11% per year
Internal Growth Rate: ~ 12%
Sustainable Growth Rate: ~ 133%
Scenario 1
 Start at $15738 million FCF
 Assume a 5year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future cash flows, discounted at a WACC of 6.86%, give a present value for the entire firm (Debt + Equity) of $396011 million. If the firm's fair value of debt is estimated at $27161 million, then the fair value of the firm's equity could be $368850 million. $368850 million / 1160 million outstanding shares is approximately $318 per share and a 20% margin of safety is $254/share.
Year

FCF
$Millions

0

15738

1

17469

2

19391

3

21524

4

23891

5

26519

Terminal
Value

428835

The firm's future cash flows, discounted at a WACC of 6.86%, give a present value for the entire firm (Debt + Equity) of $396011 million. If the firm's fair value of debt is estimated at $27161 million, then the fair value of the firm's equity could be $368850 million. $368850 million / 1160 million outstanding shares is approximately $318 per share and a 20% margin of safety is $254/share.
Scenario 2
All else being equal,
All else being equal,
 Assume a 5year growth rate in FCF of 6% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year

FCF
$Millions

0

15738

1

16682

2

17683

3

18744

4

19869

5

21061

Terminal
Value

325228

 Present Value of the entire firm (Debt + Equity): $310160 million
 Value of Equity: $282999 million or $244/share
 20% margin of safety is $195/share
Scenario 3
All else being equal,
 Discount the firm's future FCFs at 8%
 Assume a 5year growth rate in FCF of 6% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year

FCF
$Millions

0

15738

1

16682

2

17683

3

18744

4

19869

5

21061

Terminal
Value

279058

 Present Value of the entire firm (Debt + Equity): $264347 million
 Value of Equity: $237186 million or $204/share
 20% margin of safety is $163/share
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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