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IBM: valuation update

Feb. 26, 2011 5:49 PM ETIBM
Eric Cota profile picture
Eric Cota's Blog
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International Business Machines Corp ($IBM) filed a 10K annual report for 2010 recently so here's an update to my $IBM cash flow valuation posted February 7. This update incorporates the firm's year-end 2010 data. I believe $IBM is undervalued now at $162/share and fairly valued at $182/share 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 today at 9.32% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
Year FCF $Millions
2001 8605
2002 8313
2003 10014
2004 10955
2005 11072
2006 9841
2007 10584
2008 14641
2009 17326
2010 15364
Average Annual Growth: approx 8%
CAGR: approx. 7%
Consensus Forecast Industry 5-Year Growth: approx. 14% per year
Consensus Forecast Company 5-Year Growth: approx. 11% per year
Assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
Year FCF $ Millions
0 15364
1 16747
2 18254
3 19897
4 21688
5 23639
Terminal Value 276446
The firm's future cash flows, discounted at a WACC of 9.32%, give a present value for the entire firm (Debt + Equity) of $253,196 million. If the firm's fair value of debt is estimated at $30,784 million, then the fair value of the firm's equity could be $222,412 million. $222,412 million / 1220 million outstanding shares is approximately $182 per share and a 20% margin of safety is $146/share.
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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