Intrinsic value of International Business Machines - IBM

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$155.23

  Intrinsic Value

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  Value-price divergence*

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$155.23

 
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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of IBM stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 147.9

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -2.23
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  79,919
  81,517
  83,392
  85,535
  87,942
  90,608
  93,533
  96,718
  100,167
  103,881
  107,868
  112,133
  116,684
  121,530
  126,679
  132,144
  137,935
  144,065
  150,547
  157,397
  164,629
  172,260
  180,307
  188,790
  197,728
  207,141
  217,052
  227,484
  238,461
  250,010
  262,157
Variable operating expenses, $m
 
  65,621
  67,131
  68,856
  70,793
  72,939
  75,294
  77,858
  80,634
  83,624
  86,834
  90,267
  93,931
  97,831
  101,977
  106,376
  111,038
  115,972
  121,191
  126,704
  132,526
  138,669
  145,147
  151,976
  159,171
  166,748
  174,727
  183,124
  191,961
  201,258
  211,036
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  67,589
  65,621
  67,131
  68,856
  70,793
  72,939
  75,294
  77,858
  80,634
  83,624
  86,834
  90,267
  93,931
  97,831
  101,977
  106,376
  111,038
  115,972
  121,191
  126,704
  132,526
  138,669
  145,147
  151,976
  159,171
  166,748
  174,727
  183,124
  191,961
  201,258
  211,036
Operating income, $m
  12,330
  15,896
  16,261
  16,679
  17,149
  17,669
  18,239
  18,860
  19,532
  20,257
  21,034
  21,866
  22,753
  23,698
  24,702
  25,768
  26,897
  28,093
  29,357
  30,692
  32,103
  33,591
  35,160
  36,814
  38,557
  40,392
  42,325
  44,359
  46,500
  48,752
  51,121
EBITDA, $m
  16,711
  18,737
  19,168
  19,660
  20,213
  20,826
  21,498
  22,231
  23,023
  23,877
  24,793
  25,774
  26,820
  27,933
  29,117
  30,373
  31,704
  33,113
  34,603
  36,177
  37,840
  39,594
  41,443
  43,393
  45,447
  47,611
  49,889
  52,287
  54,810
  57,464
  60,256
Interest expense (income), $m
  1,158
  1,213
  1,276
  1,351
  1,437
  1,534
  1,641
  1,758
  1,886
  2,025
  2,174
  2,334
  2,505
  2,688
  2,882
  3,089
  3,309
  3,541
  3,787
  4,047
  4,323
  4,613
  4,919
  5,242
  5,583
  5,942
  6,320
  6,718
  7,136
  7,577
  8,041
Earnings before tax, $m
  12,330
  14,683
  14,986
  15,328
  15,711
  16,135
  16,598
  17,102
  17,646
  18,232
  18,860
  19,532
  20,248
  21,010
  21,820
  22,679
  23,589
  24,552
  25,570
  26,645
  27,780
  28,978
  30,241
  31,572
  32,974
  34,451
  36,005
  37,642
  39,363
  41,175
  43,080
Tax expense, $m
  449
  3,964
  4,046
  4,139
  4,242
  4,356
  4,481
  4,617
  4,764
  4,923
  5,092
  5,274
  5,467
  5,673
  5,891
  6,123
  6,369
  6,629
  6,904
  7,194
  7,501
  7,824
  8,165
  8,524
  8,903
  9,302
  9,721
  10,163
  10,628
  11,117
  11,632
Net income, $m
  11,872
  10,719
  10,939
  11,190
  11,469
  11,778
  12,117
  12,484
  12,882
  13,309
  13,768
  14,258
  14,781
  15,338
  15,929
  16,556
  17,220
  17,923
  18,666
  19,451
  20,279
  21,154
  22,076
  23,047
  24,071
  25,149
  26,284
  27,478
  28,735
  30,057
  31,448

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  8,959
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  117,470
  111,059
  113,613
  116,533
  119,811
  123,444
  127,429
  131,769
  136,467
  141,528
  146,959
  152,770
  158,970
  165,572
  172,588
  180,033
  187,922
  196,274
  205,105
  214,437
  224,290
  234,686
  245,650
  257,207
  269,384
  282,208
  295,711
  309,923
  324,879
  340,612
  357,162
Adjusted assets (=assets-cash), $m
  108,511
  111,059
  113,613
  116,533
  119,811
  123,444
  127,429
  131,769
  136,467
  141,528
  146,959
  152,770
  158,970
  165,572
  172,588
  180,033
  187,922
  196,274
  205,105
  214,437
  224,290
  234,686
  245,650
  257,207
  269,384
  282,208
  295,711
  309,923
  324,879
  340,612
  357,162
Revenue / Adjusted assets
  0.737
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
  0.734
Average production assets, $m
  14,866
  28,123
  28,770
  29,510
  30,340
  31,260
  32,269
  33,368
  34,557
  35,839
  37,214
  38,686
  40,256
  41,928
  43,704
  45,590
  47,588
  49,702
  51,939
  54,302
  56,797
  59,430
  62,206
  65,133
  68,216
  71,464
  74,883
  78,482
  82,269
  86,253
  90,444
Working capital, $m
  7,613
  6,766
  6,922
  7,099
  7,299
  7,520
  7,763
  8,028
  8,314
  8,622
  8,953
  9,307
  9,685
  10,087
  10,514
  10,968
  11,449
  11,957
  12,495
  13,064
  13,664
  14,298
  14,966
  15,670
  16,411
  17,193
  18,015
  18,881
  19,792
  20,751
  21,759
Total debt, $m
  42,168
  36,456
  38,607
  41,065
  43,825
  46,884
  50,239
  53,893
  57,849
  62,110
  66,684
  71,576
  76,797
  82,355
  88,263
  94,531
  101,175
  108,206
  115,643
  123,500
  131,796
  140,550
  149,782
  159,512
  169,765
  180,563
  191,932
  203,899
  216,492
  229,740
  243,674
Total liabilities, $m
  99,224
  93,512
  95,663
  98,121
  100,881
  103,940
  107,295
  110,949
  114,905
  119,166
  123,740
  128,632
  133,853
  139,411
  145,319
  151,587
  158,231
  165,262
  172,699
  180,556
  188,852
  197,606
  206,838
  216,568
  226,821
  237,619
  248,988
  260,955
  273,548
  286,796
  300,730
Total equity, $m
  18,246
  17,547
  17,951
  18,412
  18,930
  19,504
  20,134
  20,819
  21,562
  22,361
  23,220
  24,138
  25,117
  26,160
  27,269
  28,445
  29,692
  31,011
  32,407
  33,881
  35,438
  37,080
  38,813
  40,639
  42,563
  44,589
  46,722
  48,968
  51,331
  53,817
  56,432
Total liabilities and equity, $m
  117,470
  111,059
  113,614
  116,533
  119,811
  123,444
  127,429
  131,768
  136,467
  141,527
  146,960
  152,770
  158,970
  165,571
  172,588
  180,032
  187,923
  196,273
  205,106
  214,437
  224,290
  234,686
  245,651
  257,207
  269,384
  282,208
  295,710
  309,923
  324,879
  340,613
  357,162
Debt-to-equity ratio
  2.311
  2.080
  2.150
  2.230
  2.320
  2.400
  2.500
  2.590
  2.680
  2.780
  2.870
  2.970
  3.060
  3.150
  3.240
  3.320
  3.410
  3.490
  3.570
  3.650
  3.720
  3.790
  3.860
  3.930
  3.990
  4.050
  4.110
  4.160
  4.220
  4.270
  4.320
Adjusted equity ratio
  0.097
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  11,872
  10,719
  10,939
  11,190
  11,469
  11,778
  12,117
  12,484
  12,882
  13,309
  13,768
  14,258
  14,781
  15,338
  15,929
  16,556
  17,220
  17,923
  18,666
  19,451
  20,279
  21,154
  22,076
  23,047
  24,071
  25,149
  26,284
  27,478
  28,735
  30,057
  31,448
Depreciation, amort., depletion, $m
  4,381
  2,841
  2,906
  2,981
  3,065
  3,158
  3,259
  3,370
  3,491
  3,620
  3,759
  3,908
  4,066
  4,235
  4,415
  4,605
  4,807
  5,020
  5,246
  5,485
  5,737
  6,003
  6,283
  6,579
  6,891
  7,219
  7,564
  7,927
  8,310
  8,712
  9,136
Funds from operations, $m
  18,189
  13,559
  13,846
  14,170
  14,534
  14,936
  15,376
  15,855
  16,372
  16,930
  17,527
  18,166
  18,847
  19,573
  20,343
  21,161
  22,027
  22,943
  23,912
  24,936
  26,017
  27,157
  28,359
  29,626
  30,961
  32,368
  33,848
  35,406
  37,045
  38,770
  40,584
Change in working capital, $m
  1,231
  133
  156
  178
  200
  221
  243
  264
  286
  308
  331
  354
  378
  402
  427
  454
  481
  509
  538
  569
  600
  633
  668
  704
  742
  781
  823
  866
  911
  959
  1,008
Cash from operations, $m
  16,958
  26,764
  13,690
  13,992
  14,334
  14,715
  15,133
  15,590
  16,086
  16,621
  17,196
  17,812
  18,470
  19,171
  19,916
  20,707
  21,546
  22,434
  23,374
  24,367
  25,416
  26,523
  27,691
  28,922
  30,220
  31,586
  33,025
  34,540
  36,134
  37,811
  39,576
Maintenance CAPEX, $m
  0
  -2,783
  -2,841
  -2,906
  -2,981
  -3,065
  -3,158
  -3,259
  -3,370
  -3,491
  -3,620
  -3,759
  -3,908
  -4,066
  -4,235
  -4,415
  -4,605
  -4,807
  -5,020
  -5,246
  -5,485
  -5,737
  -6,003
  -6,283
  -6,579
  -6,891
  -7,219
  -7,564
  -7,927
  -8,310
  -8,712
New CAPEX, $m
  -4,150
  -574
  -647
  -739
  -830
  -920
  -1,009
  -1,099
  -1,190
  -1,282
  -1,375
  -1,471
  -1,570
  -1,672
  -1,777
  -1,885
  -1,998
  -2,115
  -2,236
  -2,363
  -2,495
  -2,633
  -2,776
  -2,927
  -3,083
  -3,248
  -3,419
  -3,599
  -3,787
  -3,984
  -4,191
Cash from investing activities, $m
  -10,976
  -3,357
  -3,488
  -3,645
  -3,811
  -3,985
  -4,167
  -4,358
  -4,560
  -4,773
  -4,995
  -5,230
  -5,478
  -5,738
  -6,012
  -6,300
  -6,603
  -6,922
  -7,256
  -7,609
  -7,980
  -8,370
  -8,779
  -9,210
  -9,662
  -10,139
  -10,638
  -11,163
  -11,714
  -12,294
  -12,903
Free cash flow, $m
  5,982
  23,407
  10,202
  10,347
  10,523
  10,730
  10,966
  11,232
  11,526
  11,849
  12,201
  12,582
  12,992
  13,433
  13,904
  14,407
  14,943
  15,513
  16,117
  16,758
  17,436
  18,154
  18,912
  19,712
  20,557
  21,448
  22,387
  23,377
  24,420
  25,517
  26,672
Issuance/(repayment) of debt, $m
  2,763
  1,801
  2,151
  2,459
  2,760
  3,058
  3,356
  3,654
  3,955
  4,261
  4,573
  4,893
  5,221
  5,559
  5,907
  6,269
  6,643
  7,032
  7,436
  7,857
  8,296
  8,754
  9,232
  9,731
  10,253
  10,798
  11,369
  11,967
  12,593
  13,248
  13,935
Issuance/(repurchase) of shares, $m
  -3,298
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -535
  1,801
  2,151
  2,459
  2,760
  3,058
  3,356
  3,654
  3,955
  4,261
  4,573
  4,893
  5,221
  5,559
  5,907
  6,269
  6,643
  7,032
  7,436
  7,857
  8,296
  8,754
  9,232
  9,731
  10,253
  10,798
  11,369
  11,967
  12,593
  13,248
  13,935
Total cash flow (excl. dividends), $m
  5,396
  25,208
  12,353
  12,806
  13,283
  13,788
  14,322
  14,886
  15,482
  16,110
  16,774
  17,474
  18,213
  18,991
  19,811
  20,676
  21,586
  22,545
  23,553
  24,615
  25,732
  26,907
  28,143
  29,443
  30,810
  32,246
  33,757
  35,344
  37,012
  38,765
  40,607
Retained Cash Flow (-), $m
  -3,984
  -315
  -404
  -461
  -518
  -574
  -630
  -686
  -742
  -800
  -858
  -918
  -980
  -1,043
  -1,109
  -1,176
  -1,247
  -1,320
  -1,395
  -1,474
  -1,557
  -1,643
  -1,732
  -1,826
  -1,924
  -2,026
  -2,133
  -2,246
  -2,363
  -2,486
  -2,615
Prev. year cash balance distribution, $m
 
  1,014
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  25,907
  11,950
  12,344
  12,766
  13,215
  13,692
  14,200
  14,739
  15,311
  15,916
  16,556
  17,233
  17,948
  18,703
  19,499
  20,340
  21,225
  22,158
  23,141
  24,176
  25,265
  26,411
  27,617
  28,886
  30,220
  31,623
  33,098
  34,649
  36,279
  37,992
Discount rate, %
 
  6.50
  6.83
  7.17
  7.52
  7.90
  8.30
  8.71
  9.15
  9.60
  10.08
  10.59
  11.12
  11.67
  12.26
  12.87
  13.51
  14.19
  14.90
  15.64
  16.43
  17.25
  18.11
  19.01
  19.96
  20.96
  22.01
  23.11
  24.27
  25.48
  26.75
PV of cash for distribution, $m
 
  24,326
  10,471
  10,030
  9,550
  9,035
  8,488
  7,914
  7,318
  6,708
  6,090
  5,472
  4,864
  4,273
  3,706
  3,172
  2,677
  2,225
  1,819
  1,463
  1,155
  894
  679
  504
  366
  259
  179
  121
  79
  50
  31
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

International Business Machines Corporation provides information technology (IT) products and services worldwide. The company’s Global Technology Services segment provides IT infrastructure services, such as IT outsourcing, integrated technology, cloud, and technology support services. Its Global Business Services segment offers consulting and systems integration services for strategy and transformation, application innovation services, enterprise applications, and analytics; application management, maintenance, and support services; and processing platforms and business process outsourcing services. The company’s Software segment provides middleware and operating systems software, including WebSphere software to integrate and manage business processes; information management software that enables clients to integrate, manage, and analyze data from various sources; Tivoli software that manages business infrastructure in real time; Workforce Solutions, which enables businesses to connect people and processes; and Rational software that supports software development. This segment also provides Watson software to interact in natural language, process big data, and learn from interactions with people and computers; Watson Health that offers data analytics and insights of individual health; and Watson Internet of Things that allows direct sensing and communication of data. Its Systems Hardware segment offers infrastructure technologies, such as servers for businesses, organizations, and technical computing applications; and data storage products and solutions. The company’s Global Financing segment provides lease and loan financing; commercial financing to suppliers, distributors, and remarketers; and remanufacturing and remarketing services. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. The company was founded in 1910 and is headquartered in Armonk, New York.

FINANCIAL RATIOS  of  International Business Machines (IBM)

Valuation Ratios
P/E Ratio 12.4
Price to Sales 1.8
Price to Book 8
Price to Tangible Book
Price to Cash Flow 8.7
Price to Free Cash Flow 11.5
Growth Rates
Sales Growth Rate -2.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -0%
Cap. Spend. - 3 Yr. Gr. Rate 0%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 189.9%
Total Debt to Equity 231.1%
Interest Coverage 12
Management Effectiveness
Return On Assets 11.4%
Ret/ On Assets - 3 Yr. Avg. 11.4%
Return On Total Capital 20.7%
Ret/ On T. Cap. - 3 Yr. Avg. 22.1%
Return On Equity 73%
Return On Equity - 3 Yr. Avg. 81.1%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 47.9%
Gross Margin - 3 Yr. Avg. 49.2%
EBITDA Margin 22.4%
EBITDA Margin - 3 Yr. Avg. 25.1%
Operating Margin 15.4%
Oper. Margin - 3 Yr. Avg. 18.8%
Pre-Tax Margin 15.4%
Pre-Tax Margin - 3 Yr. Avg. 18.8%
Net Profit Margin 14.9%
Net Profit Margin - 3 Yr. Avg. 14.6%
Effective Tax Rate 3.6%
Eff/ Tax Rate - 3 Yr. Avg. 13.7%
Payout Ratio 44.3%

IBM stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the IBM stock intrinsic value calculation we used $79919 million for the last fiscal year's total revenue generated by International Business Machines. The default revenue input number comes from 2016 income statement of International Business Machines. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our IBM stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 6.5%, whose default value for IBM is calculated based on our internal credit rating of International Business Machines, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of International Business Machines.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of IBM stock the variable cost ratio is equal to 80.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for IBM stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for International Business Machines.

Corporate tax rate of 27% is the nominal tax rate for International Business Machines. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the IBM stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for IBM are equal to 34.5%.

Life of production assets of 9.9 years is the average useful life of capital assets used in International Business Machines operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for IBM is equal to 8.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $18246 million for International Business Machines - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 953.064 million for International Business Machines is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of International Business Machines at the current share price and the inputted number of shares is $147.9 billion.


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Stock chart of IBM Financial statements of IBM Annual reports of IBM
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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