The stock of International Business Machines (NYSE:IBM, 30-year Financials) shows every sign of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $144.47 per share and the market cap of $129.1 billion, International Business Machines stock shows every sign of being modestly overvalued. GF Value for International Business Machines is shown in the chart below.
Because International Business Machines is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. International Business Machines has a cash-to-debt ratio of 0.18, which which ranks better than 100% of the companies in Market Overview industry. The overall financial strength of International Business Machines is 4 out of 10, which indicates that the financial strength of International Business Machines is poor. This is the debt and cash of International Business Machines over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. International Business Machines has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $73.8 billion and earnings of $5.98 a share. Its operating margin is 10.82%, which ranks better than 100% of the companies in Market Overview industry. Overall, the profitability of International Business Machines is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of International Business Machines over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of International Business Machines is -0.9%, which ranks better than 100% of the companies in Market Overview industry. The 3-year average EBITDA growth rate is -7.3%, which ranks better than 100% of the companies in Market Overview industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, International Business Machines’s ROIC was 5.34, while its WACC came in at 6.62. The historical ROIC vs WACC comparison of International Business Machines is shown below:
In conclusion, International Business Machines (NYSE:IBM, 30-year Financials) stock appears to be modestly overvalued. The company’s financial condition is poor and its profitability is fair. Its growth ranks better than 100% of the companies in Market Overview industry. To learn more about International Business Machines stock, you can check out its 30-year Financials here.
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