Stock Analysis on Net
Stock Analysis on Net

International Business Machines Corp. (NYSE:IBM)

Present Value of Free Cash Flow to the Firm (FCFF)

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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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

International Business Machines Corp., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 9.20%
01 FCFF0 13,884
1 FCFF1 13,579 = 13,884 × (1 + -2.20%) 12,436
2 FCFF2 13,449 = 13,579 × (1 + -0.96%) 11,279
3 FCFF3 13,486 = 13,449 × (1 + 0.27%) 10,357
4 FCFF4 13,689 = 13,486 × (1 + 1.51%) 9,628
5 FCFF5 14,065 = 13,689 × (1 + 2.75%) 9,060
5 Terminal value (TV5) 224,059 = 14,065 × (1 + 2.75%) ÷ (9.20% – 2.75%) 144,317
Intrinsic value of International Business Machines Corp. capital 197,077
Less: Debt (fair value) 54,710
Intrinsic value of International Business Machines Corp. common stock 142,367
 
Intrinsic value of International Business Machines Corp. common stock (per share) $155.30
Current share price $181.58

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

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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.

Weighted Average Cost of Capital (WACC)

International Business Machines Corp., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 166,463 0.75 11.24%
Debt (fair value) 54,710 0.25 2.98% = 3.42% × (1 – 13.00%)

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

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 916,744,848 × $181.58
= $166,462,529,499.84

   Debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (14.00% + 21.00% + 3.00% + 21.00% + 6.00%) ÷ 5
= 13.00%

WACC = 9.20%

FCFF Growth Rate (g)

FCFF 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)
Interest expense 1,607 1,216 1,155 1,288 1,344
Income (loss) from discontinued operations, net of tax (12) (143) 1,031 89 (4)
Net income attributable to IBM 7,502 1,639 5,743 5,590 9,431
 
Effective income tax rate (EITR)1 14.00% 21.00% 3.00% 21.00% 6.00%
 
Interest expense, after tax2 1,382 961 1,120 1,018 1,263
Add: Cash dividends paid, common stock 6,040 5,948 5,869 5,797 5,707
Interest expense (after tax) and dividends 7,422 6,909 6,989 6,815 6,970
 
EBIT(1 – EITR)3 8,896 2,743 5,832 6,519 10,698
 
Short-term debt 6,426 4,760 6,787 7,183 8,797
Long-term debt, excluding current maturities 50,121 46,189 44,917 54,355 54,102
Total IBM stockholders’ equity 22,533 21,944 18,901 20,597 20,841
Total capital 79,080 72,893 70,605 82,135 83,740
Financial Ratios
Retention rate (RR)4 0.17 -1.52 -0.20 -0.05 0.35
Return on invested capital (ROIC)5 11.25% 3.76% 8.26% 7.94% 12.78%
Averages
RR -0.25
ROIC 8.80%
 
FCFF growth rate (g)6 -2.20%

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).

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2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,607 × (1 – 14.00%)
= 1,382

3 EBIT(1 – EITR) = Net income attributable to IBM – Income (loss) from discontinued operations, net of tax + Interest expense, after tax
= 7,502 – -12 + 1,382
= 8,896

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [8,896 – 7,422] ÷ 8,896
= 0.17

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 8,896 ÷ 79,080
= 11.25%

6 g = RR × ROIC
= -0.25 × 8.80%
= -2.20%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (221,173 × 9.20% – 13,884) ÷ (221,173 + 13,884)
= 2.75%

where:

Total capital, fair value0 = current fair value of International Business Machines Corp. debt and equity (US$ in millions)
FCFF0 = the last year International Business Machines Corp. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of International Business Machines Corp. capital

FCFF growth rate (g) forecast

International Business Machines Corp., H-model

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Year Value gt
1 g1 -2.20%
2 g2 -0.96%
3 g3 0.27%
4 g4 1.51%
5 and thereafter g5 2.75%

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)
= -2.20% + (2.75% – -2.20%) × (2 – 1) ÷ (5 – 1)
= -0.96%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= -2.20% + (2.75% – -2.20%) × (3 – 1) ÷ (5 – 1)
= 0.27%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= -2.20% + (2.75% – -2.20%) × (4 – 1) ÷ (5 – 1)
= 1.51%