ibm stock valuation-ppt
TRANSCRIPT
International Business Machines:IBM
Presented by: Zahra Bajgiran, Mikhail Karasik, Jason Oakley,Kyle Thoresen, and Svetlana Zotikova
Company Overview
• Founded in 1911 through the merger of 3 companies• Old success: predominantly hardware-based up to 1990’s• New success: 84% of business is software and services• 410,830 Employees
Book Market
Total long term debt 21,932,000 21,932,000
Total shareholder
equity22,637,000 173,724,904
Total Capital 44,569,000 195,956,904
Weight of Debt 49% 11%
Weight of equity 51% 89%
Weight of Debt, Equity
• 1 - Market value• 2 - Book value
Weight of Debt, Equity
Market
Weight of Debt
Weight of Equity
Book
Weight of DebtWeight of Equity
Cost of Equity
CAPM model Beta R2 ResultKs = Krf+(RPm)*b 0.819 0.35 7.94%
Fama-French Model Resultks = kRF + bi(rM - rRF) + ci(rSMB) + di(rHML) 8.76%
Bond-Yield-plus-Market Risk Premium Bond Yield MRP ResultKce=Kd+RP 4.65 5 9.65%
Cost of Debt(1) Total interest expense paid/total debt based on balance sheet Total debt: 26,100,000 Interest expense paid: 402,000 Kd: 0.0154023 1.54%
(2) Annual report: Total debt: 26,100,000 Interest expense paid: 1,109,000 Kd: 4.25%
WACCWACC = Wd*Kd (1-T)+We*Ke
• Tax rate: 25.9%• Wd: 11%• Kd: 4.65% (Bond Yield)• We: 89%• Ke: 7.94% (CAPM), 9.65% (BY+RPM), or 8.76% (FF)
WACC
Model WACC
CAPM 7.43%
Fama-French 8.16%
Bond – Yield—Plus—Market Risk Premium 8.96%
Sales Growth Rate
• 2004: 2.43% Growth• 2005: 2.37% Growth• 2006: 2.32% Growth• 2007: 2.27 % Growth• 2008: 2.22% Growth Forecasted Sales• 2009: 2.17% Growth• 2010: 2.12% Growth• 2011: 2.08% Growth• 2012: $109,649,000
COGS and R&D Ratios
1st Qtr 2010 2009 2008 2007 2006 2005
Total Revenue $22,857,000 $95,758,000 $103,630,000 $98,786,000 $91,424,000 $91,134,000
R & D $1,509,000 $5,820,000 $6,337,000 $6,153,000 $6,107,000 $5,842,000
COGS $12,880,000 $51,973,000 $57,969,000 $57,057,000 $53,129,000 $54,602,000
Percent of Total Revenue Average
R & D 6.60% 6.08% 6.12% 6.23% 6.68% 6.41% 6.35%
COGS 56.35% 54.28% 55.94% 57.76% 58.11% 59.91% 57.06%
Forecasting: AFN’s2010 Pass
Additional Funds Needed (12,442,178) (141,843) (1,617) (18) Short / Current Long Term Debt (1,986,935) (22,651) (258) (3) Long Term Debt (10,455,243) (119,191) (1,359) (15) Additional Interest (191,638) (2,185) (25) (0)
2011 Pass Additional Funds Needed (12,883,277) (146,871) (1,674) (19) Short / Current Long Term Debt (2,057,375) (23,454) (267) (3) Long Term Debt (10,825,902) (123,417) (1,407) (16) Additional Interest (198,432) (2,262) (26) (0)
2012 Pass Additional Funds Needed (13,329,446) (5,501) (0) N/A Short / Current Long Term Debt (77,058) (0) N/A N/A Long Term Debt (405,481) (0) N/A N/A Additional Short Term Investment 12,846,906 5,501 (0) N/A Additional Interest (7,432) (0) N/A N/A
Free Cash Flow Growth• FCF = NOPAT- Investment in Operating Capital
2012 2011 2010 2009 2008
13,334,928 13,037,325 12,739,721 16,483,544 21,872,607
2009.5 2010 2010.5 2011 2011.5 2012 2012.512400000
12500000
12600000
12700000
12800000
12900000
13000000
13100000
13200000
13300000
13400000 2010 12,739,319
2011 13,036,797 2.34%
2012 13,334,272 2.28%
2013 13,631,753 2.23%
2014 13,929,231 2.18%
2015 14,226,709 2.14%
2016 14,524,187 2.09%
Intrinsic Value of Operation• Horizon value = FCF2012*(1+g)
WACC- g
• Operation Value = PV of expected FCFWACC 8.56%
Average growth rate 2.23%
Horizon value 215,384,326
Adjusted FCF 228,719,254 13,037,325 12,739,721
Intrinsic Value of Operation $201,565,552
Corporate Value & MVA• Total Value = Vop + Vnon-operating assets
• MVA = Market Value of Stock - Total Equity
Operating value 201,565,552
Non-operating Value 1,791,000
Total Corporation Value $203,356,552
Intrinsic Value of Stock $133.56
Actual Stock Price 2009 $130.90
Intrinsic MVA $154,619,552
Intrinsic Equity Value & Stock Price
1. Total corporation value $203,356,5522. Less: Value of debt $26,100,000 Preferred stock $03. Intrinsic value of equity $177,256,5524. Divide by number of shares 1,327,1575. Intrinsic value per share $133.56
Actual stock price on 12/31/09 $130.90
MMM Approach
Computer Software/Services = 84% EBIT multiple = 11.35
Computers/Peripherals = 16% EBIT multiple = 10.28
EBIT Multiple for IBM = 11.18 (Weighted average)
Intrinsic Value of Stock Per Share = $136.50
Actual stock price on 12/31/09 = $130.90
ROIC and EVA Analysis
ROIC = NOPAT / Operating Capital = 18.20%
WACC = 8.56%
ROIC - WACC = 9.64% (Firm is adding value)
EVA = Operating Capital * (ROIC-WACC) = 7,268,268
IBM Firm Value• WACC influences firm value• Intrinsic value of stock ~ (1 / WACC ) n
• Industry has higher cost of debt, but similar cost of equity
Industry Name Beta Cost of Equity WACC Cost of Debt Weight of equity
Weight of Debt Tax Rate After-tax Cost of
Debt
Computer Software/Services 1.02 8.94% 8.84% 7.84% 94.68% 5.32% 10.12% 7.05%
Computers/Peripherals 1.29 10.28% 9.97% 7.84% 90.14% 9.86% 8.65% 7.16%Industry (Weighted
Average)* 1.06 9.15% 9.02% 7.84% 93.96% 6.04% 9.88% 7.07%
CAPM 0.82 7.94% 7.43% 4.65% 88.79% 11.21% 25.98% 3.44%
Fama French N/A 8.76% 8.16% 4.65% 88.79% 11.21% 25.98% 3.44%
Bond Yield + Risk Premium N/A 9.65% 8.96% 4.65% 88.79% 11.21% 25.98% 3.44%
Average (FF) and (BY + RP) N/A 9.21% 8.56% 4.65% 88.79% 11.21% 25.98% 3.44%
IBM Firm Value• Dependent on method used to determine cost of equity
• Some methods were remarkably close
• Average of FF and Bond Yield + Risk Premium showed best correlation
CAPM FF Bond Yield +
Risk PremiumAverage (FF) and
(BY + RP) Industry MMM
Intrinsic Value of Stock($/sh) 166.50 143.69 124.62 133.56 123.31 136.50
Actual Stock Price End of Year 2009 ($/sh) 130.90 130.90 130.90 130.90 130.90 130.9
Was the Stock Overvalued or Undervalued? under under over under over under
Scenario Analysis
• FCF growth positive but less than inflation
• IBM is too big to have a large growth rate
• Stock probably fairly priced
Scenario Analysis (WACC = average of FF and BY + RP)
Average growth rate of FCF (g) -1.00% 2.10% 2.37% 3.00%
Intrinsic Value of Equity 116,841,271 173,724,986 181,157,046 201,982,962
Total Numbers of Common Stocks Out. 1,327,157,410 1,327,157,410 1,327,157,410 1,327,157,410
Intrinsic Value of Stock Per Share 88.04 130.90 136.50 152.19
Actual Stock Price at the End of Y2009 130.90 130.90 130.90 130.90
Was the Stock Overvalued or Undervalued?
Stock overvalued Fair Stock
undervaluedStock
undervalued
MMM
How to Increase Equity
• Reduce WACC (difficult)
• Incentivize management to grow FCF
• Limit dividend growth (eventually)
• In the end, company strategy plays a crucial role
Strategy Shift
1950 1960 1970 1980 1990 2000 2010 2020
-10,000
-5,000
0
5,000
10,000
15,000
YearNet
Inco
me
($ m
illio
ns)
Software/Services emphasis
Hardware emphasis
~$130 / share (today)
~$10.50 / share (1993)
~$31 / share (1985)
Thank you!