Intrinsic value of International Business Machines - IBM

Previous Close

$146.83

  Intrinsic Value

$172.25

stock screener

  Rating & Target

hold

+17%

  Value-price divergence*

-6%

Previous close

$146.83

 
Intrinsic value

$172.25

 
Up/down potential

+17%

 
Rating

hold

 
Value-price divergence*

-6%

*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 137.6

 

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
 
  65,549
  66,973
  68,602
  70,430
  72,455
  74,677
  77,097
  79,717
  82,539
  85,568
  85,188
  88,646
  92,327
  96,239
  100,390
  104,790
  109,447
  114,372
  119,575
  125,069
  130,867
  136,980
  143,425
  150,215
  157,366
  164,895
  172,820
  181,160
  189,934
  199,162
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
  65,549
  66,973
  68,602
  70,430
  72,455
  74,677
  77,097
  79,717
  82,539
  85,568
  85,188
  88,646
  92,327
  96,239
  100,390
  104,790
  109,447
  114,372
  119,575
  125,069
  130,867
  136,980
  143,425
  150,215
  157,366
  164,895
  172,820
  181,160
  189,934
  199,162
Operating income, $m
  12,330
  15,968
  16,419
  16,934
  17,512
  18,153
  18,856
  19,621
  20,450
  21,342
  22,300
  26,945
  28,039
  29,203
  30,440
  31,753
  33,145
  34,618
  36,176
  37,822
  39,559
  41,393
  43,327
  45,365
  47,513
  49,775
  52,156
  54,663
  57,301
  60,076
  62,995
EBITDA, $m
  16,711
  20,942
  21,424
  21,974
  22,592
  23,277
  24,029
  24,847
  25,733
  26,687
  27,711
  28,807
  29,976
  31,221
  32,544
  33,948
  35,436
  37,011
  38,676
  40,436
  42,293
  44,254
  46,321
  48,500
  50,797
  53,215
  55,761
  58,441
  61,261
  64,228
  67,349
Interest expense (income), $m
  1,158
  1,213
  1,274
  1,349
  1,435
  1,532
  1,639
  1,756
  1,884
  2,023
  2,172
  2,332
  2,503
  2,685
  2,880
  3,087
  3,306
  3,538
  3,784
  4,044
  4,319
  4,609
  4,916
  5,239
  5,579
  5,938
  6,315
  6,713
  7,132
  7,572
  8,036
Earnings before tax, $m
  12,330
  14,755
  15,145
  15,584
  16,077
  16,621
  17,217
  17,865
  18,565
  19,320
  20,129
  24,613
  25,536
  26,517
  27,560
  28,667
  29,839
  31,080
  32,392
  33,777
  35,240
  36,784
  38,411
  40,127
  41,934
  43,837
  45,841
  47,950
  50,169
  52,504
  54,959
Tax expense, $m
  449
  3,984
  4,089
  4,208
  4,341
  4,488
  4,648
  4,823
  5,013
  5,216
  5,435
  6,646
  6,895
  7,160
  7,441
  7,740
  8,057
  8,392
  8,746
  9,120
  9,515
  9,932
  10,371
  10,834
  11,322
  11,836
  12,377
  12,946
  13,546
  14,176
  14,839
Net income, $m
  11,872
  10,771
  11,056
  11,377
  11,736
  12,133
  12,568
  13,041
  13,553
  14,103
  14,694
  17,968
  18,641
  19,358
  20,119
  20,927
  21,783
  22,688
  23,646
  24,657
  25,725
  26,852
  28,040
  29,292
  30,612
  32,001
  33,464
  35,003
  36,623
  38,328
  40,120

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
  110,607
  113,151
  116,059
  119,324
  122,941
  126,910
  131,233
  135,911
  140,952
  146,361
  152,148
  158,323
  164,898
  171,885
  179,300
  187,157
  195,475
  204,270
  213,564
  223,377
  233,731
  244,650
  256,160
  268,287
  281,059
  294,507
  308,662
  323,556
  339,226
  355,708
Adjusted assets (=assets-cash), $m
  108,511
  110,607
  113,151
  116,059
  119,324
  122,941
  126,910
  131,233
  135,911
  140,952
  146,361
  152,148
  158,323
  164,898
  171,885
  179,300
  187,157
  195,475
  204,270
  213,564
  223,377
  233,731
  244,650
  256,160
  268,287
  281,059
  294,507
  308,662
  323,556
  339,226
  355,708
Revenue / Adjusted assets
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
  0.737
Average production assets, $m
  14,866
  15,162
  15,511
  15,910
  16,357
  16,853
  17,397
  17,990
  18,631
  19,322
  20,063
  20,857
  21,703
  22,605
  23,562
  24,579
  25,656
  26,796
  28,002
  29,276
  30,621
  32,040
  33,537
  35,115
  36,777
  38,528
  40,372
  42,312
  44,354
  46,502
  48,761
Working capital, $m
  7,613
  6,277
  6,421
  6,586
  6,772
  6,977
  7,202
  7,447
  7,713
  7,999
  8,306
  8,634
  8,985
  9,358
  9,754
  10,175
  10,621
  11,093
  11,592
  12,120
  12,676
  13,264
  13,884
  14,537
  15,225
  15,950
  16,713
  17,516
  18,361
  19,251
  20,186
Total debt, $m
  42,168
  36,407
  38,557
  41,014
  43,773
  46,829
  50,183
  53,836
  57,789
  62,048
  66,619
  71,509
  76,727
  82,283
  88,187
  94,452
  101,092
  108,120
  115,553
  123,406
  131,698
  140,447
  149,674
  159,399
  169,647
  180,439
  191,802
  203,763
  216,349
  229,590
  243,517
Total liabilities, $m
  99,224
  93,463
  95,613
  98,070
  100,829
  103,885
  107,239
  110,892
  114,845
  119,104
  123,675
  128,565
  133,783
  139,339
  145,243
  151,508
  158,148
  165,176
  172,609
  180,462
  188,754
  197,503
  206,730
  216,455
  226,703
  237,495
  248,858
  260,819
  273,405
  286,646
  300,573
Total equity, $m
  18,246
  17,144
  17,538
  17,989
  18,495
  19,056
  19,671
  20,341
  21,066
  21,847
  22,686
  23,583
  24,540
  25,559
  26,642
  27,791
  29,009
  30,299
  31,662
  33,102
  34,623
  36,228
  37,921
  39,705
  41,584
  43,564
  45,649
  47,843
  50,151
  52,580
  55,135
Total liabilities and equity, $m
  117,470
  110,607
  113,151
  116,059
  119,324
  122,941
  126,910
  131,233
  135,911
  140,951
  146,361
  152,148
  158,323
  164,898
  171,885
  179,299
  187,157
  195,475
  204,271
  213,564
  223,377
  233,731
  244,651
  256,160
  268,287
  281,059
  294,507
  308,662
  323,556
  339,226
  355,708
Debt-to-equity ratio
  2.311
  2.120
  2.200
  2.280
  2.370
  2.460
  2.550
  2.650
  2.740
  2.840
  2.940
  3.030
  3.130
  3.220
  3.310
  3.400
  3.480
  3.570
  3.650
  3.730
  3.800
  3.880
  3.950
  4.010
  4.080
  4.140
  4.200
  4.260
  4.310
  4.370
  4.420
Adjusted equity ratio
  0.097
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155
  0.155

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  11,872
  10,771
  11,056
  11,377
  11,736
  12,133
  12,568
  13,041
  13,553
  14,103
  14,694
  17,968
  18,641
  19,358
  20,119
  20,927
  21,783
  22,688
  23,646
  24,657
  25,725
  26,852
  28,040
  29,292
  30,612
  32,001
  33,464
  35,003
  36,623
  38,328
  40,120
Depreciation, amort., depletion, $m
  4,381
  4,974
  5,005
  5,040
  5,080
  5,125
  5,173
  5,226
  5,283
  5,345
  5,411
  1,862
  1,938
  2,018
  2,104
  2,195
  2,291
  2,393
  2,500
  2,614
  2,734
  2,861
  2,994
  3,135
  3,284
  3,440
  3,605
  3,778
  3,960
  4,152
  4,354
Funds from operations, $m
  18,189
  15,745
  16,060
  16,417
  16,816
  17,258
  17,741
  18,267
  18,836
  19,448
  20,105
  19,830
  20,579
  21,376
  22,223
  23,121
  24,073
  25,081
  26,146
  27,271
  28,459
  29,713
  31,035
  32,428
  33,895
  35,441
  37,069
  38,781
  40,584
  42,480
  44,474
Change in working capital, $m
  1,231
  123
  144
  165
  185
  205
  225
  245
  266
  286
  307
  328
  350
  373
  397
  421
  446
  472
  499
  527
  557
  588
  620
  653
  688
  725
  763
  803
  845
  889
  935
Cash from operations, $m
  16,958
  15,622
  15,916
  16,252
  16,631
  17,052
  17,516
  18,022
  18,571
  19,162
  19,798
  19,502
  20,228
  21,003
  21,826
  22,701
  23,627
  24,609
  25,647
  26,744
  27,903
  29,125
  30,415
  31,775
  33,207
  34,716
  36,305
  37,978
  39,738
  41,590
  43,539
Maintenance CAPEX, $m
  0
  -1,327
  -1,354
  -1,385
  -1,420
  -1,460
  -1,505
  -1,553
  -1,606
  -1,663
  -1,725
  -1,791
  -1,862
  -1,938
  -2,018
  -2,104
  -2,195
  -2,291
  -2,393
  -2,500
  -2,614
  -2,734
  -2,861
  -2,994
  -3,135
  -3,284
  -3,440
  -3,605
  -3,778
  -3,960
  -4,152
New CAPEX, $m
  -4,150
  -297
  -349
  -399
  -448
  -496
  -544
  -592
  -641
  -691
  -742
  -793
  -846
  -901
  -958
  -1,016
  -1,077
  -1,140
  -1,206
  -1,274
  -1,345
  -1,419
  -1,497
  -1,578
  -1,662
  -1,751
  -1,843
  -1,940
  -2,042
  -2,148
  -2,259
Cash from investing activities, $m
  -10,976
  -1,624
  -1,703
  -1,784
  -1,868
  -1,956
  -2,049
  -2,145
  -2,247
  -2,354
  -2,467
  -2,584
  -2,708
  -2,839
  -2,976
  -3,120
  -3,272
  -3,431
  -3,599
  -3,774
  -3,959
  -4,153
  -4,358
  -4,572
  -4,797
  -5,035
  -5,283
  -5,545
  -5,820
  -6,108
  -6,411
Free cash flow, $m
  5,982
  13,998
  14,213
  14,468
  14,763
  15,096
  15,467
  15,876
  16,323
  16,808
  17,331
  16,917
  17,520
  18,164
  18,850
  19,580
  20,356
  21,178
  22,049
  22,970
  23,943
  24,972
  26,057
  27,202
  28,410
  29,682
  31,022
  32,433
  33,919
  35,482
  37,127
Issuance/(repayment) of debt, $m
  2,763
  1,752
  2,150
  2,457
  2,759
  3,057
  3,354
  3,652
  3,953
  4,259
  4,571
  4,890
  5,218
  5,556
  5,904
  6,265
  6,640
  7,028
  7,432
  7,853
  8,292
  8,749
  9,227
  9,726
  10,247
  10,793
  11,363
  11,961
  12,586
  13,241
  13,927
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
  1,752
  2,150
  2,457
  2,759
  3,057
  3,354
  3,652
  3,953
  4,259
  4,571
  4,890
  5,218
  5,556
  5,904
  6,265
  6,640
  7,028
  7,432
  7,853
  8,292
  8,749
  9,227
  9,726
  10,247
  10,793
  11,363
  11,961
  12,586
  13,241
  13,927
Total cash flow (excl. dividends), $m
  5,396
  15,750
  16,363
  16,926
  17,522
  18,153
  18,821
  19,528
  20,276
  21,067
  21,902
  21,807
  22,738
  23,719
  24,755
  25,846
  26,995
  28,206
  29,481
  30,823
  32,235
  33,721
  35,284
  36,928
  38,657
  40,474
  42,385
  44,394
  46,505
  48,723
  51,054
Retained Cash Flow (-), $m
  -3,984
  -344
  -394
  -451
  -506
  -561
  -615
  -670
  -725
  -781
  -838
  -897
  -957
  -1,019
  -1,083
  -1,149
  -1,218
  -1,289
  -1,363
  -1,441
  -1,521
  -1,605
  -1,692
  -1,784
  -1,880
  -1,980
  -2,084
  -2,194
  -2,309
  -2,429
  -2,555
Prev. year cash balance distribution, $m
 
  1,446
  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
 
  16,852
  15,969
  16,475
  17,016
  17,592
  18,206
  18,858
  19,551
  20,286
  21,064
  20,910
  21,781
  22,700
  23,672
  24,697
  25,777
  26,917
  28,118
  29,382
  30,714
  32,116
  33,592
  35,144
  36,777
  38,495
  40,301
  42,200
  44,196
  46,294
  48,500
Discount rate, %
 
  6.40
  6.72
  7.06
  7.41
  7.78
  8.17
  8.58
  9.01
  9.46
  9.93
  10.42
  10.95
  11.49
  12.07
  12.67
  13.31
  13.97
  14.67
  15.40
  16.17
  16.98
  17.83
  18.72
  19.66
  20.64
  21.67
  22.76
  23.89
  25.09
  26.34
PV of cash for distribution, $m
 
  15,838
  14,021
  13,427
  12,785
  12,096
  11,366
  10,601
  9,808
  8,996
  8,174
  7,024
  6,262
  5,518
  4,803
  4,125
  3,493
  2,914
  2,393
  1,932
  1,532
  1,192
  909
  679
  495
  353
  246
  166
  110
  70
  44
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 (IBM) is a technology company. The Company operates through five segments: Cognitive Solutions, Global Business Services (GBS), Technology Services & Cloud Platforms, Systems and Global Financing. The Cognitive Solutions segment delivers a spectrum of capabilities, from descriptive, predictive and prescriptive analytics to cognitive systems. Cognitive Solutions includes Watson, a cognitive computing platform that has the ability to interact in natural language, process big data, and learn from interactions with people and computers. The GBS segment provides clients with consulting, application management services and global process services. The Technology Services & Cloud Platforms segment provides information technology infrastructure services. The Systems segment provides clients with infrastructure technologies. The Global Financing segment includes client financing, commercial financing, and remanufacturing and remarketing.

FINANCIAL RATIOS  of  International Business Machines (IBM)

Valuation Ratios
P/E Ratio 11.7
Price to Sales 1.7
Price to Book 7.6
Price to Tangible Book
Price to Cash Flow 8.2
Price to Free Cash Flow 10.8
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 6.4%, 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 18.6%.

Life of production assets of 11.2 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 7.7%. 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 937.178 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 $137.6 billion.

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Financial statements 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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