Stock Analysis on Net
Stock Analysis on Net

International Business Machines Corp. (NYSE:IBM)

Present Value of Free Cash Flow to Equity (FCFE)

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

International Business Machines Corp., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 11.28%
01 FCFE0 16,939
1 FCFE1 14,933 = 16,939 × (1 + -11.84%) 13,419
2 FCFE2 13,649 = 14,933 × (1 + -8.60%) 11,022
3 FCFE3 12,918 = 13,649 × (1 + -5.36%) 9,374
4 FCFE4 12,645 = 12,918 × (1 + -2.11%) 8,245
5 FCFE5 12,788 = 12,645 × (1 + 1.13%) 7,493
5 Terminal value (TV5) 127,411 = 12,788 × (1 + 1.13%) ÷ (11.28% – 1.13%) 74,661
Intrinsic value of International Business Machines Corp. common stock 124,214
 
Intrinsic value of International Business Machines Corp. common stock (per share) $135.49
Current share price $184.10

Based on: 10-K (reporting date: 2023-12-31).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.86%
Expected rate of return on market portfolio2 E(RM) 13.54%
Systematic risk of International Business Machines Corp. common stock βIBM 0.74
 
Required rate of return on International Business Machines Corp. common stock3 rIBM 11.28%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rIBM = RF + βIBM [E(RM) – RF]
= 4.86% + 0.74 [13.54% – 4.86%]
= 11.28%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

International Business Machines Corp., PRAT model

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Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Cash dividends paid, common stock 6,040 5,948 5,869 5,797 5,707
Net income attributable to IBM 7,502 1,639 5,743 5,590 9,431
Revenue 61,860 60,530 57,350 73,620 77,147
Total assets 135,241 127,243 132,001 155,971 152,186
Total IBM stockholders’ equity 22,533 21,944 18,901 20,597 20,841
Financial Ratios
Retention rate1 0.19 -2.63 -0.02 -0.04 0.39
Profit margin2 12.13% 2.71% 10.01% 7.59% 12.22%
Asset turnover3 0.46 0.48 0.43 0.47 0.51
Financial leverage4 6.00 5.80 6.98 7.57 7.30
Averages
Retention rate -0.42
Profit margin 8.93%
Asset turnover 0.47
Financial leverage 6.73
 
FCFE growth rate (g)5 -11.84%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

2023 Calculations

1 Retention rate = (Net income attributable to IBM – Cash dividends paid, common stock) ÷ Net income attributable to IBM
= (7,502 – 6,040) ÷ 7,502
= 0.19

2 Profit margin = 100 × Net income attributable to IBM ÷ Revenue
= 100 × 7,502 ÷ 61,860
= 12.13%

3 Asset turnover = Revenue ÷ Total assets
= 61,860 ÷ 135,241
= 0.46

4 Financial leverage = Total assets ÷ Total IBM stockholders’ equity
= 135,241 ÷ 22,533
= 6.00

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.42 × 8.93% × 0.47 × 6.73
= -11.84%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (168,773 × 11.28% – 16,939) ÷ (168,773 + 16,939)
= 1.13%

where:
Equity market value0 = current market value of International Business Machines Corp. common stock (US$ in millions)
FCFE0 = the last year International Business Machines Corp. free cash flow to equity (US$ in millions)
r = required rate of return on International Business Machines Corp. common stock

FCFE growth rate (g) forecast

International Business Machines Corp., H-model

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Year Value gt
1 g1 -11.84%
2 g2 -8.60%
3 g3 -5.36%
4 g4 -2.11%
5 and thereafter g5 1.13%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= -11.84% + (1.13% – -11.84%) × (2 – 1) ÷ (5 – 1)
= -8.60%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= -11.84% + (1.13% – -11.84%) × (3 – 1) ÷ (5 – 1)
= -5.36%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= -11.84% + (1.13% – -11.84%) × (4 – 1) ÷ (5 – 1)
= -2.11%