Wednesday, January 20, 2010

IBM. Return ON Capital of 9.5%, Cost OF Capital 1.6% = BUY (IBM)

Yes I'm serious with that title.  IBM's 2012 debt, currently yielding 1.54% below.  Yes, these bonds have gotten a bit rich:




IBM shares are leading the DJIA to a triple digit loss today, off 2.3% in a similar "sell-the-news" reaction that greeted Intel after a great performance last week.  I've pointed to IBM shares before as my reason for liking the DJIA.

Last night, IBM beat earnings expectations for 2009's fourth quarter and boosted guidance for 2010.  Operating results were very strong across their business lines, and show a large uninterrupted string of improvement over a turbulent couple of years:



Free Cash Flow came in at about $15billion:



And yet shares are down today.  In my 2010 outlook I wrote that we could expect volatility this year that would provide us opportunities to buy "great companies at good prices," and this is one such opportunity.  Also in that 2010 outlook, my target price for IBM by 12/31/2010 is $176.  I'm moving that up to $199 today, which is an average of several assumptions, but reflects a 6-7% Free Cash Flow Yield for IBM.  Its current 9% Free Cash Flow Yield is far too rich for a company who borrows 2012 money at 1.5%, and could easily raise billions of 10year debt at just a few percent higher.  Shares are a BUY.


Copyright 2010 AlphaNinja

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