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International Business Machines: Cash Flow Valuation Update

|Includes: International Business Machines Corporation (IBM)

Current Price: ~ $197/share
Projected Yield: ~ 1.52%

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.

Estimated WACC for the firm today is 6.86% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2002 8313
2003 10014
2004 10955
2005 11072
2006 9841
2007 10584
2008 14641
2009 17326
2010 15364
2011 15738

Average Annual Growth FCF: ~ 8%

CAGR FCF: ~ 7%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year

Consensus Forecast Company 5-Year Growth: ~ 11% per year

Internal Growth Rate: ~ 12%

Sustainable Growth Rate: ~ 133%

Scenario 1

  • Start at $15738 million FCF
  • Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 15738
1 17469
2 19391
3 21524
4 23891
5 26519
Terminal Value 428835

The firm's future cash flows, discounted at a WACC of 6.86%, give a present value for the entire firm (Debt + Equity) of $396011 million. If the firm's fair value of debt is estimated at $27161 million, then the fair value of the firm's equity could be $368850 million. $368850 million / 1160 million outstanding shares is approximately $318 per share and a 20% margin of safety is $254/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 6% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 15738
1 16682
2 17683
3 18744
4 19869
5 21061
Terminal Value 325228
  • Present Value of the entire firm (Debt + Equity): $310160 million
  • Value of Equity: $282999 million or $244/share
  • 20% margin of safety is $195/share

Scenario 3
All else being equal,

  • Discount the firm's future FCFs at 8%
  • Assume a 5-year growth rate in FCF of 6% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 15738
1 16682
2 17683
3 18744
4 19869
5 21061
Terminal Value 279058
  • Present Value of the entire firm (Debt + Equity): $264347 million
  • Value of Equity: $237186 million or $204/share
  • 20% margin of safety is $163/share

Sources

Morningstar.com

Yahoo! Finance

IBM.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.