As we already well known that Mr. Warren Buffett was bought IBM share since 1 January 2011 (Based on 13F filling 03/31/2011)
So, isn't a good buy for IBM with current market price $ 208.65?
Let us make some assumption and simple mathematics to answer this question.
Assumption
1) Warren buffett bought IBM because of its intrinsic value and intrinsic value is directly affected by free cash flow.
2) Warren buffett has the ability to accurate to estimate company's free cash flow when he purchased the stock.
According to Warren buffett's shareholder letter 2011a, We can calculate warren buffett's average purchase cost per share of IBM is $169.875.
In year 2011, warren buffett bought IBM, the price/FCF ratio was 11.9 ($169.875/$14.271)
We use this price/FCF ratio to determine will warren buffett buy more IBM with current market prices.
Warren buffett will purchase price is $193.827 (11.9 x $16.288). Hence, current market price is 7.6% above this price. However, current market prices are reasonable.
Years | Free Cash Flow ($ in billions) b | Outstanding shares (in millions) | FCF/share |
2011 | $16.6 | 1163.18 | $14.271 |
2012 | $18.2 | 1117.37 | $16.288 |
FCF defines as net cash from operation (exclude Global financing Receivable) minus net capital expenditures (Non GAAP financial information)
References:
a) http://www.berkshirehathaway.com/letters/letters.html
b) IBM 8-k filing http://www.sec.gov/Archives/edgar/data/51143/000110465913003825/a13-2074_18k.htm
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
]]>As we already well known that Mr. Warren Buffett was bought IBM share since 1 January 2011 (Based on 13F filling 03/31/2011)
So, isn't a good buy for IBM with current market price $ 208.65?
Let us make some assumption and simple mathematics to answer this question.
Assumption
1) Warren buffett bought IBM because of its intrinsic value and intrinsic value is directly affected by free cash flow.
2) Warren buffett has the ability to accurate to estimate company's free cash flow when he purchased the stock.
According to Warren buffett's shareholder letter 2011a, We can calculate warren buffett's average purchase cost per share of IBM is $169.875.
In year 2011, warren buffett bought IBM, the price/FCF ratio was 11.9 ($169.875/$14.271)
We use this price/FCF ratio to determine will warren buffett buy more IBM with current market prices.
Warren buffett will purchase price is $193.827 (11.9 x $16.288). Hence, current market price is 7.6% above this price. However, current market prices are reasonable.
Years | Free Cash Flow ($ in billions) b | Outstanding shares (in millions) | FCF/share |
2011 | $16.6 | 1163.18 | $14.271 |
2012 | $18.2 | 1117.37 | $16.288 |
FCF defines as net cash from operation (exclude Global financing Receivable) minus net capital expenditures (Non GAAP financial information)
References:
a) http://www.berkshirehathaway.com/letters/letters.html
b) IBM 8-k filing http://www.sec.gov/Archives/edgar/data/51143/000110465913003825/a13-2074_18k.htm
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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