International Business Machines Corp Valuation – February 2018 $IBM

Company Profile (obtained from Marketwatch): International Business Machines Corp. is an information technology company, which provides integrated solutions that leverage information technology and knowledge of business processes. It operates through the following segments: Cognitive Solutions, Global Business Services, Technology Services & Cloud Platforms, Systems, and Global Financing. The Cognitive Solutions segment comprises a portfolio of capabilities that help IBM’s clients to identify actionable insights and inform decision making for competitive advantage. It includes Watson, a cognitive computing platform that has the ability to interact in natural language, process amounts of big data, and learn from interactions with people and computers. This segment consists of Solutions Software, which provides the basis for many of the company’s strategic areas including analytics, security and social; and Transaction Processing Software, which includes software that primarily runs mission-critical systems in industries such as banking, airlines and retail. The Global Business Services segment provides clients with consulting, application management and global process services. The Technology Services & Cloud Platforms segment provides IT infrastructure services creating business value for clients through integrated services that incorporate intellectual property within its global delivery model. The Systems segment provides clients with infrastructure technologies to help meet the requirements of hybrid cloud and cognitive workload from deploying analytics, to moving to digital service delivery with the cloud, and securing mobile transaction processing. The Global Financing segment facilitates IBM clients acquisition of information technology systems, software and services by providing financing solutions in the areas where the company functions. The company was founded by Charles Ranlett Flint and Thomas J. Watson Sr. on June 16, 1911 and is headquartered in Armonk, NY.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of IBM – February 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $143,979,103,945 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.33 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -7.43% Fail
6. Moderate PEmg Ratio PEmg < 20 13.89 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 8.21 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.33 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.22 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail


Stage 2: Determination of Intrinsic Value

EPSmg $11.20
MG Growth Estimate -2.41%
MG Value $41.31
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $162.34
MG Value based on 0% Growth $95.17
Market Implied Growth Rate 2.70%
Current Price $155.52
% of Intrinsic Value 376.47%

International Business Machines Corp. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PB ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $13.33 in 2014 to an estimated $11.2 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 2.7% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into International Business Machines Corp. revealed the company was trading above its Graham Number of $75.98. The company pays a dividend of $5.9 per share, for a yield of 3.8%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 13.89, which was below the industry average of 34.38, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-62.47.

International Business Machines Corp. receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$62.47
Graham Number $75.98
PEmg 13.89
Current Ratio 1.33
PB Ratio 8.21
Current Dividend $5.90
Dividend Yield 3.79%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Total Current Assets $49,735,000,000
Total Current Liabilities $37,363,000,000
Long-Term Debt $39,837,000,000
Total Assets $125,356,000,000
Intangible Assets $40,531,000,000
Total Liabilities $107,762,000,000
Shares Outstanding (Diluted Average) 928,900,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $13.50
Dec2017 $6.14
Dec2016 $12.38
Dec2015 $13.42
Dec2014 $11.90
Dec2013 $14.94
Dec2012 $14.37
Dec2011 $13.06
Dec2010 $11.52
Dec2009 $10.01
Dec2008 $8.89
Dec2007 $7.15
Dec2006 $6.11
Dec2005 $4.87
Dec2004 $4.38
Dec2003 $3.74
Dec2002 $2.06
Dec2001 $3.69
Dec2000 $4.44
Dec1999 $4.12
Dec1998 $3.29

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $11.20
Dec2017 $10.61
Dec2016 $13.04
Dec2015 $13.42
Dec2014 $13.33
Dec2013 $13.63
Dec2012 $12.50
Dec2011 $11.09
Dec2010 $9.65
Dec2009 $8.28
Dec2008 $7.03
Dec2007 $5.82
Dec2006 $4.85
Dec2005 $4.06
Dec2004 $3.66
Dec2003 $3.40
Dec2002 $3.33

Recommended Reading:

Other ModernGraham posts about the company

International Business Machines Corp Valuation – March 2017 $IBM
International Business Machines Corp Valuation – November 2015 Update $IBM
30 Companies in the Spotlight This Week – 11/15/14
International Business Machines Annual Valuation – 2014 $IBM
5 Outstanding Dow Components – March 2014

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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