Running the Numbers: IBM is Cheap

Valuecruncher previously completed a valuation of IBM (IBM). IBM was trading at US$126.52 when we completed that valuation. Our valuation was US $141.42. With IBM trading at US $119.42 we thought it was time to update this valuation.

Valuecruncher Valuation Model

Valuation model of IBM with interactive assumptions

Valuecruncher produces a valuation of US$128.25 for IBM. This is a current valuation not a target price. This valuation is 7.4% above the current share price of US$119.42.

Assumptions

Our assumptions are revenues of US$105.0 billion in 2008 growing to US$115.0 billion in 2010. This growth is a compound annual growth rate [CAGR] of 5% for 2007-10 this compares to a 4% CAGR from 2005-7. We have used a flat EBITDA margin of 20% to 2010. We used a terminal growth rate of 3.0%. We used a terminal capital expenditure number of US$5.5 billion. We have used a WACC (discount rate) of 9.0%. All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.

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

Based on our analysis the current share price looks cheap. It appears an opportunity to be buying $IBM. Play with our assumptions – what does your analysis say?

Comments

[Zed Draken:]

Very bullish here, especially given the non-US mix of revenue and thus the relative exposure to US business conditions sliding.

2008 Sep 29 12:53 PM

[curm:]

What's the basis for the 20% margins?

2008 Sep 30 09:37 AM

[Valuecruncher:]

EBITDA is a measure of profitability that we use as an estimate for cash generated by the business (then adjusted for Capital Expenditure, Depreciation and Tax to calculate free cash flow in the Valuecruncher model).

Reuters provides a EBITD margin for companies - our base case are a reasonable estimate. Below is the Reuters link for IBM:

www.reuters.com/financ...

2008 Oct 01 01:53 AM