Intrinsic value of International Business Machines - IBM

Previous Close

$139.70

  Intrinsic Value

$167.94

stock screener

  Rating & Target

buy

+20%

  Value-price divergence*

-33%

Previous close

$139.70

 
Intrinsic value

$167.94

 
Up/down potential

+20%

 
Rating

buy

 
Value-price divergence*

-33%

*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 133.1

 

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
  1,279
  1,355
  1,441
  1,538
  1,645
  1,762
  1,890
  2,029
  2,178
  2,339
  2,510
  2,693
  2,888
  3,095
  3,314
  3,547
  3,793
  4,054
  4,329
  4,620
  4,927
  5,250
  5,591
  5,950
  6,329
  6,727
  7,146
  7,587
  8,051
Earnings before tax, $m
  12,330
  14,755
  15,139
  15,579
  16,071
  16,615
  17,211
  17,859
  18,559
  19,313
  20,122
  24,606
  25,529
  26,510
  27,553
  28,659
  29,831
  31,071
  32,382
  33,768
  35,230
  36,773
  38,400
  40,115
  41,922
  43,825
  45,828
  47,936
  50,155
  52,489
  54,943
Tax expense, $m
  449
  3,984
  4,088
  4,206
  4,339
  4,486
  4,647
  4,822
  5,011
  5,215
  5,433
  6,644
  6,893
  7,158
  7,439
  7,738
  8,054
  8,389
  8,743
  9,117
  9,512
  9,929
  10,368
  10,831
  11,319
  11,833
  12,374
  12,943
  13,542
  14,172
  14,835
Net income, $m
  11,872
  10,771
  11,052
  11,373
  11,732
  12,129
  12,564
  13,037
  13,548
  14,099
  14,689
  17,963
  18,636
  19,352
  20,114
  20,921
  21,776
  22,682
  23,639
  24,650
  25,718
  26,844
  28,032
  29,284
  30,603
  31,992
  33,454
  34,993
  36,613
  38,317
  40,109

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
  111,974
  114,550
  117,494
  120,799
  124,461
  128,479
  132,855
  137,591
  142,694
  148,170
  154,029
  160,280
  166,936
  174,010
  181,516
  189,471
  197,891
  206,796
  216,204
  226,138
  236,621
  247,675
  259,327
  271,604
  284,534
  298,148
  312,477
  327,556
  343,420
  360,105
Adjusted assets (=assets-cash), $m
  108,511
  111,974
  114,550
  117,494
  120,799
  124,461
  128,479
  132,855
  137,591
  142,694
  148,170
  154,029
  160,280
  166,936
  174,010
  181,516
  189,471
  197,891
  206,796
  216,204
  226,138
  236,621
  247,675
  259,327
  271,604
  284,534
  298,148
  312,477
  327,556
  343,420
  360,105
Revenue / Adjusted assets
  0.737
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
  0.728
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
  36,555
  38,708
  41,169
  43,932
  46,993
  50,353
  54,011
  57,970
  62,236
  66,814
  71,712
  76,938
  82,503
  88,416
  94,692
  101,342
  108,381
  115,825
  123,691
  131,996
  140,759
  150,000
  159,741
  170,005
  180,814
  192,196
  204,175
  216,781
  230,043
  243,992
Total liabilities, $m
  99,224
  93,611
  95,764
  98,225
  100,988
  104,049
  107,409
  111,067
  115,026
  119,292
  123,870
  128,768
  133,994
  139,559
  145,472
  151,748
  158,398
  165,437
  172,881
  180,747
  189,052
  197,815
  207,056
  216,797
  227,061
  237,870
  249,252
  261,231
  273,837
  287,099
  301,048
Total equity, $m
  18,246
  18,364
  18,786
  19,269
  19,811
  20,412
  21,071
  21,788
  22,565
  23,402
  24,300
  25,261
  26,286
  27,378
  28,538
  29,769
  31,073
  32,454
  33,915
  35,458
  37,087
  38,806
  40,619
  42,530
  44,543
  46,664
  48,896
  51,246
  53,719
  56,321
  59,057
Total liabilities and equity, $m
  117,470
  111,975
  114,550
  117,494
  120,799
  124,461
  128,480
  132,855
  137,591
  142,694
  148,170
  154,029
  160,280
  166,937
  174,010
  181,517
  189,471
  197,891
  206,796
  216,205
  226,139
  236,621
  247,675
  259,327
  271,604
  284,534
  298,148
  312,477
  327,556
  343,420
  360,105
Debt-to-equity ratio
  2.311
  1.990
  2.060
  2.140
  2.220
  2.300
  2.390
  2.480
  2.570
  2.660
  2.750
  2.840
  2.930
  3.010
  3.100
  3.180
  3.260
  3.340
  3.420
  3.490
  3.560
  3.630
  3.690
  3.760
  3.820
  3.870
  3.930
  3.980
  4.040
  4.080
  4.130
Adjusted equity ratio
  0.097
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164
  0.164

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  11,872
  10,771
  11,052
  11,373
  11,732
  12,129
  12,564
  13,037
  13,548
  14,099
  14,689
  17,963
  18,636
  19,352
  20,114
  20,921
  21,776
  22,682
  23,639
  24,650
  25,718
  26,844
  28,032
  29,284
  30,603
  31,992
  33,454
  34,993
  36,613
  38,317
  40,109
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
  16,057
  16,413
  16,812
  17,254
  17,737
  18,263
  18,832
  19,444
  20,100
  19,825
  20,574
  21,371
  22,217
  23,116
  24,067
  25,074
  26,139
  27,264
  28,452
  29,705
  31,027
  32,419
  33,887
  35,432
  37,059
  38,771
  40,573
  42,469
  44,462
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
  15,912
  16,248
  16,627
  17,048
  17,512
  18,018
  18,566
  19,158
  19,793
  19,497
  20,223
  20,998
  21,821
  22,695
  23,621
  24,602
  25,640
  26,737
  27,895
  29,118
  30,407
  31,766
  33,198
  34,707
  36,296
  37,968
  39,728
  41,579
  43,527
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
  14,210
  14,465
  14,759
  15,092
  15,463
  15,872
  16,319
  16,803
  17,327
  16,912
  17,515
  18,158
  18,845
  19,575
  20,350
  21,171
  22,042
  22,963
  23,936
  24,964
  26,049
  27,194
  28,401
  29,673
  31,012
  32,423
  33,908
  35,471
  37,116
Issuance/(repayment) of debt, $m
  2,763
  1,900
  2,153
  2,461
  2,763
  3,062
  3,359
  3,658
  3,960
  4,266
  4,578
  4,898
  5,226
  5,564
  5,914
  6,275
  6,650
  7,039
  7,444
  7,866
  8,305
  8,763
  9,241
  9,741
  10,263
  10,810
  11,381
  11,979
  12,606
  13,262
  13,949
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
  1,900
  2,153
  2,461
  2,763
  3,062
  3,359
  3,658
  3,960
  4,266
  4,578
  4,898
  5,226
  5,564
  5,914
  6,275
  6,650
  7,039
  7,444
  7,866
  8,305
  8,763
  9,241
  9,741
  10,263
  10,810
  11,381
  11,979
  12,606
  13,262
  13,949
Total cash flow (excl. dividends), $m
  5,396
  15,898
  16,363
  16,926
  17,522
  18,154
  18,822
  19,530
  20,278
  21,069
  21,905
  21,810
  22,741
  23,723
  24,758
  25,850
  27,000
  28,211
  29,486
  30,828
  32,241
  33,727
  35,291
  36,935
  38,664
  40,482
  42,394
  44,403
  46,514
  48,733
  51,065
Retained Cash Flow (-), $m
  -3,984
  -309
  -422
  -483
  -542
  -601
  -659
  -718
  -777
  -837
  -898
  -961
  -1,025
  -1,092
  -1,160
  -1,231
  -1,305
  -1,381
  -1,460
  -1,543
  -1,629
  -1,719
  -1,813
  -1,911
  -2,013
  -2,121
  -2,233
  -2,350
  -2,473
  -2,602
  -2,736
Prev. year cash balance distribution, $m
 
  191
  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
 
  15,780
  15,940
  16,443
  16,980
  17,553
  18,163
  18,812
  19,501
  20,232
  21,007
  20,849
  21,715
  22,631
  23,598
  24,619
  25,695
  26,830
  28,026
  29,285
  30,612
  32,008
  33,478
  35,024
  36,651
  38,362
  40,161
  42,053
  44,041
  46,131
  48,328
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
 
  14,831
  13,996
  13,401
  12,758
  12,069
  11,340
  10,575
  9,783
  8,972
  8,152
  7,004
  6,243
  5,501
  4,788
  4,112
  3,482
  2,905
  2,385
  1,926
  1,527
  1,188
  906
  676
  494
  352
  245
  166
  109
  70
  43
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 11.1
Price to Sales 1.7
Price to Book 7.2
Price to Tangible Book
Price to Cash Flow 7.8
Price to Free Cash Flow 10.3
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 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 $133.1 billion.

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Stock chart of IBM 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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