IBM Is Trading Well Below Its Intrinsic Value

At Valuecruncher we have looked at IBM several times.  Our valuations have been in the US$128 – US$141 range. IBM is currently trading at US$88.86 - when we looked previously IBM was trading at US$126.52 and US$119.42.  We thought that it was time to revisit our valuation.

Valuecruncher valuation model of $IBM with interactive assumptions

Valuecruncher produces a valuation of US$130.55 for $IBM. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 46.9% above the current share price of US$88.86.

Assumptions

• Revenue: Reuters aggregates 17 analysts covering $IBM and these analysts have mean estimates of 2008 and 2009 revenues of US$106.7 billion and US$111.7 billion respectively. For our analysis we have used US$105.0 billion in 2008, US$106.5 billion in 2009 and US$110.0 billion in 2010.
• Profitability: We have used an EBITDA margin of 20% flat to 2010. Reuters has $IBM‘s EBITD margin at 20.26% last year.
• Capital Expenditure: We have assumed capital expenditures of US$5.0 billion in 2008 and 2009 rising to US$5.5 million in 2010 and beyond.
• Discount Rate: 10.5%.
• Terminal Growth Rate: 3.0%.

Our analysis incorporates the cash and debt the $IBM balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

View the full IBM chart at Wikinvest

Disclosure: None.

Comments

[bobbobwhite:]

This article is totally wrong in using past or even present revenue and profit estimates in valuing IBM as the estimate is distorted way upward. Nearly all stock rev/eps estimates will see some lowering due to negative fallout from the recent Wall street debacle, and some will be drastically cut and others will fail entirely.

Any thoughtful valuation must now wait for new rev/eps estimates based on the depressed economy expected to be the case for the rest of 2008 and 2009, and it will be killer bad for many and worse for others.

2008 Oct 22 12:39 PM

[casey00001:]

Sure right. Sounds like Arthur Anderson Accounting.

2008 Oct 23 02:39 PM

[Everyoneisa...:]

While I tend to agree with you that most forward looking analysis (like DCF's) are flawed because of our proven lack of forecasting ability, I have to take issue with your comment. Instead of dismissing it out of hand, why don't you use it to analyze what is baked in to today's price? Then, if you really think that IBM is going to see an x% decline in revenues indefinitely (when 50% of their revs are recurring) and an x% decline in margins you can make an assessment on today's price and IBM's intrinsic value.

I think too often in this environment we are just simply saying 'things are going to get worse'. Probably true, but how bad does it have to be to justify these prices? It seems like traditional measures of valuation have been forgotten. Fear dominates, like greed did in the Internet bubble. Long-term I think we will look back on this period as an excellent opportunity. Short-term, unfortunately, we are at the mercy of irrational behaviour motivated by sentiment alone. A stock's price is a lot more volatile than its fundamentals.

On Oct 22 12:39 PM bobbobwhite wrote:

> This article is totally wrong in using past or even present revenue
> and profit estimates in valuing IBM as the estimate is distorted
> way upward. Nearly all stock rev/eps estimates will see some lowering
> due to negative fallout from the recent Wall street debacle, and
> some will be drastically cut and others will fail entirely.
>
> Any thoughtful valuation must now wait for new rev/eps estimates
> based on the depressed economy expected to be the case for the rest
> of 2008 and 2009, and it will be killer bad for many and worse for
> others.

2008 Nov 12 08:29 AM