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IBM: fairly valued with a margin of safety

|Includes: International Business Machines Corporation (IBM)

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.