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| Finally, the Financing segment assists clients by providing a variety of services such as lease financing, instalment payment options, loan financing, and short-term working capital solutions. | | Finally, the Financing segment assists clients by providing a variety of services such as lease financing, instalment payment options, loan financing, and short-term working capital solutions. |
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| <Youtube>ytJ4G1fhhgs</Youtube>
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| == Team == | | == Team == |
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| Rob's professional journey with IBM's software business began in 2007, with a focus on data and analytics, a field in which he has excelled and driven innovation. | | Rob's professional journey with IBM's software business began in 2007, with a focus on data and analytics, a field in which he has excelled and driven innovation. |
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| Originally from Florida, Rob pursued his studies at Vanderbilt University, earning a BA in Economics. Subsequently, during his pursuit of an MBA at the University of Florida, he delved into equity research, gaining expertise in applied economics, finance, and financial analysis. Outside of his professional endeavours, Rob actively serves on the board of Domus in Stamford, CT; an organisation dedicated to assisting underprivileged children in Fairfield County. | | Originally from Florida, Rob pursued his studies at Vanderbilt University, earning a BA in Economics. Subsequently, during his pursuit of an MBA at the University of Florida, he delved into equity research, gaining expertise in applied economics, finance, and financial analysis. Outside of his professional endeavours, Rob actively serves on the board of Domus in Stamford, CT. Domus is an organisation dedicated to assisting underprivileged children in Fairfield County. |
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| == Financials == | | == Financials == |
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| === Historic performance === | | === Historic performance === |
| [[File:Historical performance.jpg|center|thumb|669x669px|<ref name=":1">Source: Bloomberg LLP</ref>]]<sub>(Figures are rounded for simplicity of reading)</sub> | | [[File:Historical performance.jpg|center|thumb|669x669px|<ref>Source: Bloomberg LLP</ref>]] |
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| The above image shows the primary financial highlights attributed to IBM over the past 10 years. A general decline is seen within most items such as market cap, enterprise value and revenues over the past 10 years. However, a potential increase in all items can also be envisioned, which is attributed to the recovery from the COVID-19 pandemic of 2019. This change may also be due to the change of CEO which occurred in 2019.
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| === Forecasts ===
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| [[File:DCF forecast.png|center|thumb|562x562px]]
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| <sub>(Figures are rounded for simplicity of reading)</sub>
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| The above image shows items from the income statement adjusted to arrive at the free cash flows to the firm for the next five financial years. This five year DCF valuation forecast can be used to understand how the firm will perform in the upcoming years. Several assumptions are made to arrive at this data, including the weighted average cost of capital and the perpetual growth rate for the next five years.
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| == Assumptions ==
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| In order to obtain the results seen in the forecasts section above, some assumptions were made within the calculations, including that of the weighted average cost of capital, and the long term growth rate observed by IBM. These assumptions are presented within this section.
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| === Weighted Average Cost of Capital (WACC) ===
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| As of '''''27/07/2023''''', the closing price of '''''142.97''''' is used to calculate the market capitalisation.
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| [[File:Market Cap.png|center|thumb|634x634px]]
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| Additionally, the total debt within IBM can be seen below:
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| [[File:Debt.png|center|thumb|623x623px]]
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| Adding both the total debt and the market cap provides a calculation of the volume. Volume is used to calculate the percent of equity and debt within the capital structure by dividing each component by the volume. This results in the current capital structure of '''68%''' equity to '''32%''' debt.
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| Furthermore, the cost of equity and the pre tax cost of debt<ref name=":1" /> has been used to calculate the current weighted average cost of capital. The values are '''9.52%''' and '''5.43%''' respectively. This leads to a WACC calculation of '''7.99%'''.
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| <sub>(Cost of equity was calculated using the CAPM formula)</sub>
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| === Growth rate in perpetuity and implied premium ===
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| The perpetual growth rate for the firm has been taken as the forecast of the world GDP growth estimate<ref>https://www.oecd.org/economic-outlook/june-2023/</ref>, and is shown below:
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| [[File:World GDP growth forecast.png|center|thumb|826x826px]]
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| Using this data, the terminal value (TV) has been calculated. By discounting the TV and adding it to the PV of FCF, the enterprise value is calculated. Several adjustments are then made to obtain the equity value (such as taking away net debt and adding minority interests). This is then divided by current shares outstanding to obtain the implied share price of '''$204.27''' to be reached by '''31/12/2023''', resulting an implied premium of '''52.69%'''. The above mentioned data and the WACC & growth rates used to obtain this data is presented below.
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| [[File:Implied premium.png|center|thumb|481x481px]]
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| == Looking forward ==
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| Within this next section, I cover the sensitivity analysis, peer group comparison, and product lines from a future perspective for IBM. Any and all recent updates which will effect the company in future years will be discussed here, including changes to the product line, valuation in terms of considering the company by comparing it to its peers to see if it is over or under-valued and how the forecasted share price may change with time depending on updates and revisions being made to either the capital structure (which will effect the WACC) or the growth rate (due to changes in the world economic outlook forecasts).
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| == Sensitivity analysis ==
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| The purpose of a sensitivity analysis is to provide the reader with more depth of knowledge of the valuation process. In a situation in which the reader agree with the general principles and methodologies of valuation utilised by the analyst, but disagrees with some of the calculated or estimated numbers due to the assumptions used to arrive at said numbers, the sensitivity analysis provides further scenarios that can be considered by the reader of the valuation.
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| Firstly, the implied premium has been sensitised. It should be noted that even tiny changes to the WACC or growth rate can lead to large changes in the future share price.
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| [[File:Sensitivity1 .png|center|thumb|665x665px]]
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| Next, the enterprise value has been sensitised. It should be noted that these values are still in millions of dollars.
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| [[File:Sens2.png|center|thumb|666x666px]]
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| With the inclusion of this sensitivity analysis, the reader can get a better understanding of the large scale changes that can occur at different estimations of both the growth rate and the WACC. It also allows the reader to keep either one of the variables constant, while changing the other, incase they agree with the justifications for one variable but not the other.
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| == Peer group comparison ==
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| IBM has a large variety of potential competitors due to their diverse range of services offered. A list of similar companies can be seen below.
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| Taking the Price to Earnings ratio and Enterprise value to EBITDA multiple for IBM, and comparing it with the mean of IBM's identified peer companies, it can be seen that IBM is undervalued when considering the PE ratio, but overvalued when looking at the EV/EBITDA multiple.
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| [[File:Peer group.png|center|thumb|420x420px]]
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| == Product lines ==
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| As of 2023, IBM operates within 3 inter-related industries and a fourth which is less related to the rest of the business. The primary business lines are:
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| * Software
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| * Consulting
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| * Infrastructure
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| Additionally, IBM also contains a Financing division, which makes up only 1% of its revenues.
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| The overall business line sizes are summarised below in the pie chart:
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| [[File:Pie.png|center|thumb|301x301px]]Recently, IBM separated a large portion of their infrastructure business into a separate company named Kyndryl. This move was performed in order to keep up with the growing competition within the managed infrastructure business that deals with hybrid cloud management services. This will allow IBM to refine their business, to grow into a firm with a focus on the software and consulting industry. Financing operations have also been winding down as the company believes that it can best deliver results with their software and consulting divisions.
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| == References == | | == References == |
| __INDEX__ | | __INDEX__ |
