Starting with the comparator analysis:
- IBM is compared to Microsoft (MSFT), Oracle (ORCL), Hewlett-Packard (HPQ) and Accenture (ACN).
- On an Enterprise Value (EV) /Revenue basis IBM is valued less than half of MSFT and ORCL but nearly double HPQ and ACN. This is due to the relative profitability of those revenues - at the EBITDA line approximately 20% for IBM versus 43-45% for MSFT and ORCL and 12-14% for HPQ and ACN.
- On an EV/EBITDA basis - the company's profits are being valued more closely. EBITDA is a measure of profitability - Earnings Before Interest, Taxes, Depreciation and Amortization.
Note: Enterprise Value is calculated as Market Capitalization plus Net Debt [Long-term Borrowings less Cash].
Our DCF valuation produces a value of US$108.42. This is just under 2% below the current share price of US$110.60.
- Revenue: Reuters aggregates 18 analysts covering IBM and the mean estimates of 2009 and 2010 revenues are US$95.2 billion and US$97.3 billion respectively. For our analysis we have used US$95.0 billion in 2009, US$97.0 billion in 2010 and US$99.0 billion in 2011.
- Profitability: We have used an EBITDA margin of 22.5% in 2009 rising to 23.0% in 2010. Reuters has IBM‘s EBITD margin at 20.8% last year and an average of 17.9% over the last five-years.
- Capital Expenditure: We have assumed capital expenditures of US$4.0 billion in 2009, US$4.5 billion in 2010 then US$5.0 billion per annum moving forward.
- Discount Rate: 10.5%.
- Terminal Growth Rate: 3.0%.
Our analysis incorporates the cash and debt on the IBM balance sheet – Valuecruncher calculates a net debt number.
Both the comparator and DCF valuations are interactive. You can play with the assumptions and calculate your own valuations. Based on our analysis IBM appears fairly valued.