Friday, September 18, 2009

This is why the rally could have legs (IBM)

AlphaNinja - Readers of this site know I'm depressinly skeptical about the prospects facing the US economy. But it's a market of stocks, not a stock market. Meaning that while many of us think it's time for the "market" to take a breather, the underlying stocks might argue otherwise.

IBM (IBM) is an example. Making up almost 10% of the DJIA's weight, it's hugely important to the market as a whole. Although flat on the day, Caris upgraded the stock this morning, and took their price target to $145. That is a PE(Price-to-Earnings) of under 13 for one of the world's best-run companies. A fantastic deal.

Earnings for 2010 will come in at about $14billion. As usual, Free Cash Flow will exceed net income handily, coming in at about $16.4billion. (I conservatively do not give them credit for deferred taxes.) That's an awesome yield, and here's the math:

Market Value -->>$159billion
Cash -->>$12billion
Net Purchase Price -->>$147billion
2010 Free Cash Flow -->>$16.4billion
FCFY(FreeCashFlowYield) -->>11.2%

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