International Business Machines: $IBM Cash Flow Valuation Update

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 5-Year Growth: ~ 13% per year

Consensus Forecast Company 5-Year Growth: ~ 11% per year

Internal Growth Rate: ~ 12%

Sustainable Growth Rate: ~ 133%

Scenario 1

• Start at $15738 million FCF
• Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

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,

• Assume a 5-year 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 5-year 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

Morningstar.com

Yahoo! Finance

IBM.com

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

High Praise for $IBM CEO

Sam Palmisano's Transformation of IBM (HBR.org)

$IBM Board Approves 15 Percent Increase in Quarterly Cash Dividend; Authorizes $8.0 Billion for Stock Repurchase

ST. LOUIS, Mo. - 26 Apr 2011: The IBM (NYSE: IBM) board of directors today declared a regular quarterly cash dividend of $0.75 per common share, payable June 10, 2011 to stockholders of record May 10, 2011.


Today’s dividend declaration represents an increase of $0.10, or 15 percent higher than the prior quarterly dividend of $0.65 per common share.


The board today also authorized $8 billion in additional funds for use in the company’s stock repurchase program. IBM will repurchase shares on the open market or in private transactions from time to time, depending on market conditions.


Source
IBM.com - press release

$IBM to Acquire TRIRIGA, Inc.

ARMONK, N.Y., - 22 Mar 2011: IBM (NYSE: IBM) today announced a definitive agreement to acquire privately-held TRIRIGA, Inc., a Las Vegas, Nevada-based provider of facility and real estate management software solutions. The move aims to accelerate IBM's smarter buildings initiatives by adding advanced intelligence that improves real estate performance, capital project management and the outcomes of sustainability initiatives. Financial terms were not disclosed. 


Source
IBM.com - press release

$IBM opens innovation center in Mexico to fuel growth

MEXICO CITY, - 15 Mar 2011: As part of efforts to fuel global innovation, IBM (NYSE: IBM) today opened the first IBM Innovation Center in Mexico. Local start-ups, venture capitalists, developers and academics gathered there to begin building new skills that will drive innovation across industries such as banking, communications, healthcare, retail and government.


Source
IBM.com - press release

$IBM Investor Briefing, March 8, 2011

$IBM Investor Briefing (SEC.gov)

International Business Machines: $IBM valuation update

International Business Machines Corp ($IBM) filed a 10K annual report for 2010 recently so here's an update to my $IBM cash flow valuation posted February 7.  This update incorporates the firm's year-end 2010 data.  I believe $IBM is undervalued now at $162/share and fairly valued at $182/share 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 today at 9.32% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2001	8605
2002	8313
2003	10014
2004	10955
2005	11072
2006	9841
2007	10584
2008	14641
2009	17326
2010	15364

Average Annual Growth: approx 8%
CAGR: approx. 7%

Consensus Forecast Industry 5-Year Growth: approx. 14% per year
Consensus Forecast Company 5-Year Growth: approx. 11% per year

Assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $ Millions
0	15364
1	16747
2	18254
3	19897
4	21688
5	23639
Terminal Value	276446

The firm's future cash flows, discounted at a WACC of 9.32%, give a present value for the entire firm (Debt + Equity) of $253,196 million. If the firm's fair value of debt is estimated at $30,784 million, then the fair value of the firm's equity could be $222,412 million.  $222,412 million / 1220 million outstanding shares is approximately $182 per share and a 20% margin of safety is $146/share.

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.

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:

Year	FCF $Millions
2000	3658
2001	8605
2002	8313
2003	10014
2004	10955
2005	11072
2006	9841
2007	10584
2008	14641
2009	17326
2010	16300

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

Year	FCF $ Millions
0	16300
1	17767
2	19366
3	21109
4	23009
5	25080
Terminal Value	287041

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.