Monday, December 28, 2009

Barrons is bullish on IBM, as the product mix warrants a higher multiple (IBM)

IBM was the cover-story for this weekend's Barron's, and the stock is up 1% today.

The magazine likes many aspects of the IBM story, but atop their list is the changing dynamics of the company's revenue mix.  Below I've compared info from the 2000 10k and last years, to show the difference in segment contributions to the top line.



Barrons noted that at IBM, "About half its revenues and 60% of its pretax profits are annuity-like...And IBM gets nearly 65% of its revenue from outside the US."

The stability of IBM's cash flows are why Barron's and others argue the company's shares are underpriced at 12times 2010 earnings.  As for me, I still like their Free Cash Flow Yield.

I noted back in September that IBM's cheap valuation was among my main reasons for being optimistic about the DJIA:



I still maintain that IBM is cheap.  Netting out the company's balance sheet cash, their Free Cash Flow Yield is 7.8% using a backward-looking blend of estimates, and close to a 10% yield using 2011 numbers.  That's too rich a yield (meaning the stock should be higher and the yield lower) for IBM, especially considering the firm's cheap cost of capital.  Their 2017 bonds are priced WAY above par, to yield less than 5%.



Copyright 2009 AlphaNinja

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