Comprehensive Financial Analysis

International Business Machines (IBM)

Author :

Samir Singh, EPGP 030 IIM INDORE

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Relevant Links Used :Anual Report

http://www.ibm.com/annualreport/

Balance Sheet,Income Statement and Cash Flow Statement

http://www.nasdaq.com/symbol/ibm/financials?query=income-statement

General Info and History:

https://en.wikipedia.org/wiki/IBM

http://www.ibm.com/in-en/

Introduction

International Business Machines Corporation (commonly referred to as IBM) is an American multinational technology and consulting corporation, with corporate headquarters in Armonk, New York.

IBM has constantly evolved since its inception. Over the past decade, it has steadily shifted its business mix by exiting commoditizing markets such as PCs, hard disk drives and DRAMs and focusing on higher-value, more profitable markets such as business intelligence, data analytics, business continuity, security, cloud computing, virtualization and green solutions,[19][20][21] resulting in a higher quality revenue stream and higher profit margins. IBM's operating margin expanded from 16.8% in 2004 to 24.3% in 2013, and net profit margins expanded from 9.0% in 2004 to 16.5% in 2013.

IBM acquired PwC's consulting business (2002), SPSS (2009) and Kenexa (2012), also spinning off companies like printer manufacturer Lexmark (1991), and selling off to Lenovo its personal computer product line (2005), plus its x86-based server businesses (2014). Also in 2014, IBM announced that it would go "fabless" by offloading IBM Micro Electronics semiconductor manufacturing to Global Foundries, a leader in advanced technology manufacturing, citing that semiconductor manufacturing is a capital-intensive business which is challenging to operate without scale.

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Q2 : Estimate the ratios considering only the operating assets of the company .

Operating Assets / Total Assets:

Operating Assets is not explicity mentioned in Annual Report and Balance Sheet. Assuming Operating Assets as Current Assets.

RATIO 2015 2014 2013 2012Operating Assets /Total Assets

0.384 0.4 0.4 0.41

Investments /Total Assets :

RATIO 2015 2014 2013 2012Investment /Total Assets

0.13 0.14 0.13 0.14

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IBM always keeps its investments as 13% of the Total Assets . This has been constant for over the years. Its Long Term Investment is pledged at 15.2 Billion USD . Key sectors in which IBM is investing is Analytics ,Cloud ,Mobile ,Security and Social Sectors

Relevant links

http://www.wsj.com/articles/ibm-pumps-4-billion-into-strategic-imperatives-1424959681

Key strategic investments -:

$1.2 billion in Data Centres. $1 billion in Watson Data Analytics Technology. $4 Billion Into Cloud and Mobile Initiatives.

Q2 : DU PONT ANALYSIS -Return on Equity and Return on Investment

RATIO 2015 2014 2013 2012Profit Margin (operating)=Net Income / Net Sales (revenue) 0.16 0.12 0.16 0.16

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Total Assets Turnover (Sales/Asset) 0.73 0.79 0.77 0.86

Leverage (Total Asset/Equity)7.74 9.88 5.53 6.32

Du Pont Factor , ROE=Net Income/Shareholders' Equity 0.92 1.01 0.72 0.88

ROE Trend for IBM is -:

Accenture on the other hand has ROE(Return on Equity) of 40 percent in 2015

.

Hewlett Packard has ROE of 15%

D) Common Size Statement –Vertical and Horizontal

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Common size ratios are used to compare financial statements of different-size companies, or of the same company over different periods. By expressing the items in proportion to some size-related measure, standardized financial statements can be created, revealing trends and providing insight into how the different companies compare.

Common Size Ratio   =  Item of Interest

-Reference Item

Below is the snap shot of Common Size Statement of Income Statement

Income Statement 12/31/2

01512/31/2

01412/31/2

01312/31/2

01212/31/2

01512/31/2014

12/31/2013

12/31/2012

Period Ending: Common Size Statement

Total Revenue

8,17,41,000

9,27,93,000

9,83,67,000

10,28,74,000

100.0000

100.0000

100.0000

100.0000

Cost of Revenue

4,10,57,000

4,63,86,000

4,96,83,000

5,25,13,000

50.2282%

49.9887%

50.5078%

51.0459%

Gross Profit 4,06,84,000

4,64,07,000

4,86,84,000

5,03,61,000

49.7718%

50.0113%

49.4922%

48.9541%

Operating Expenses

Research and Development

52,47,000

54,37,000

57,43,000

58,16,000 6.4191%

5.8593%

5.8383%

5.6535%

Sales, General and Admin.

1,97,48,000

2,24,38,000

2,26,29,000

2,23,89,000 24.1592

%24.180

7%23.004

7%21.763

5%Non-Recurring Items

0 0 0 0

0.0000%0.0000

%0.0000

%0.0000

%Other Operating Items

0 0 0 0

0.0000%0.0000

%0.0000

%0.0000

%Operating Income

1,56,89,000

1,85,32,000

2,03,12,000

2,21,56,000

19.1936%

19.9713%

20.6492%

21.5370%

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Add'l income/expense items

7,24,000

19,38,000

3,33,000

8,43,000

0.8857%2.0885

%0.3385

%0.8194

%Earnings Before Interest and Tax

1,64,13,000

2,04,70,000

2,06,46,000

2,29,99,000

20.0793%

22.0599%

20.9887%

22.3565%

Interest Expense

4,68,000

4,84,000

4,02,000

4,59,000 0.5725%

0.5216%

0.4087%

0.4462%

Earnings Before Tax

1,59,45,000

1,99,86,000

2,02,44,000

2,25,40,000

19.5067%

21.5383%

20.5801%

21.9103%

Income Tax 25,81,000

42,34,000

33,63,000

55,41,000 3.1575%

4.5628%

3.4188%

5.3862%

Minority Interest 0 0 0 0 0.0000%

0.0000%

0.0000%

0.0000%

Equity Earnings/Loss Unconsolidated Subsidiary 0 0 0 0 0.0000%

0.0000%

0.0000%

0.0000%

Net Income-Cont. Operations

1,33,64,000

1,57,51,000

1,68,81,000

1,69,99,000

16.3492%

16.9743%

17.1612%

16.5241%

X 1,31,90,000

1,20,22,000

1,64,83,000

1,66,04,000

16.1363%

12.9557%

16.7566%

16.1401%

Net Income Applicable to Common Shareholders

1,31,90,000

1,20,22,000

1,64,83,000

1,66,04,000

16.1363%

12.9557%

16.7566%

16.1401%

Attaching the CASH FLOW COMMON SIZE STATEMENT

Period Ending:

12/31/2015

12/31/2014

12/31/2013

12/31/2012

12/31/2015

12/31/2014

12/31/2013

12/31/2012

Cash Flow

Common Size Statement

Net Income

1,31,90,000

1,20,22,000

1,64,83,000

1,66,04,000

100.0000

100.0000

100.0000

100.0000

Depreciation

38,55,000

44,92,000

46,78,000

46,76,000

29.2267%

37.3648%

28.3808%

28.1619%

Net Income Adjustments

24,07,000

21,21,000

-12,32,00

0 7,56,00018.2487

%17.6427

%-

7.4744% 4.5531%

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Accounts Receivable 8,12,000

12,70,000

-14,07,00

0

-22,30,00

0 6.1562%10.5640

%-

8.5361%

-13.4305

%Changes in Inventories 1,33,000 -39,000 -57,000 2,80,000 1.0083%

-0.3244%

-0.3458% 1.6863%

Other Operating Activities

-34,48,00

0

-18,86,00

0-

7,47,000 7,33,000

-26.1410

%

-15.6879

%-

4.5319% 4.4146%

Liabilities59,000

-11,11,00

0-

2,35,000

-12,32,00

0 0.4473%-

9.2414%-

1.4257%-

7.4199%Net Cash Flow-Operating

1,70,08,000

1,68,68,000

1,74,85,000

1,95,86,000

128.9462%

140.3094%

106.0790%

117.9595%

Capital Expenditures

-35,79,00

0

-37,40,00

0

-36,23,00

0

-40,82,00

0

-27.1342

%

-31.1096

%

-21.9802

%

-24.5844

%

Investments -

6,29,000-

9,23,000-

7,98,000

-15,75,00

0-

4.7688%-

7.6776%-

4.8414%-

9.4857%Other Investing Activities

-39,52,00

016,62,00

0

-29,04,00

0

-33,48,00

0

-29.9621

%13.8247

%

-17.6182

%

-20.1638

%Net Cash Flows-Investing

-81,59,00

0

-30,01,00

0

-73,26,00

0

-90,04,00

0

-61.8575

%

-24.9626

%

-44.4458

%

-54.2279

%Sale and Purchase of Stock

-42,87,00

0

-1,29,70,

000

-1,27,85,

000

-1,04,55,

000

-32.5019

%

-107.885

5%

-77.5648

%

-62.9668

%Net Borrowings 19,000

17,83,000

69,61,000

22,52,000 0.1440%

14.8311%

42.2314%

13.5630%

Other Financing Activities 0 0 0 0 0.0000% 0.0000% 0.0000% 0.0000%Net Cash Flows-Financing

-91,66,00

0

-1,54,52,

000

-98,83,00

0

-1,19,76,

000

-69.4920

%

-128.531

0%

-59.9587

%

-72.1272

%Effect of Exchange Rate

-4,73,000

-6,55,000 28,000

-1,16,000

-3.5861%

-5.4483% 0.1699%

-0.6986%

Net Cash Flow -

7,90,000

-22,40,00

0 3,04,000

-15,11,00

0-

5.9894%

-18.6325

% 1.8443%-

9.1002%(values in 000's)

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Analysis on the Basis of Cash Flow Statement

IBM cash flow statement is one of the important reports considered by investors doing fundamental analysis. Cash flow statement provides details of cash flow movements.

(values in 000's)

Period Ending: 12/31/2015 12/31/2014 12/31/2013 12/31/2012

Cash Flow

Net Income 1,31,90,000 1,20,22,000 1,64,83,000 1,66,04,000

Net Income is on constant decline for IBM .However the ratio of decline has varied in past few years .

Additional Funds Needed ?

Cash Components

12/31/2015

12/31/2014

12/31/2013

12/31/2012

Retained Earnings 14,61,24,000

13,77,93,000

13,00,42,000

11,76,41,000

Liabilities 11,04,95,000

11,72,71,000

12,62,23,000

11,92,13,000

Net Borrowings 19,000 17,83,000 69,61,000 22,52,000(values in 000's)

The Net Borrowings has substantially decreased in 2015 to 19,000 .IBM has done good to maintain its liabilities to constant level . Its Retained Earnings are increasing every year but the growth percentage varies around 6 percent .

Market Capitalization: $188 billionCash Hoard: $11.76 billion

As of now ,IBM does not need any additional funds immediately in near future .

Cash Components12/31/2015 12/31/2014 12/31/2013 12/31/2012

Capital Expenditures-35,79,000 -37,40,000 -36,23,000 -40,82,000

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Investments -6,29,000 -9,23,000 -7,98,000 -15,75,000Other Investing Activities -39,52,000 16,62,000 -29,04,000 -33,48,000Net Cash Flows-Investing -81,59,000 -30,01,000 -73,26,000 -90,04,000

(values in 000's)

CAPITAL STRUCTURE

A capital structure is a mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

Glimpse of IBM Capital Structure:

Capital Strucure12/31/2015 12/31/2014 12/31/2013 12/31/2012

Long Term Debt 33428000 34991000 32856000 24088000Short Term Debt 6461000 5731000 6862000 9181000Common Stoks 53262000 52666000 51594000 50110000Other Stocks -29607000 -27875000 -21602000 -25759000Treasury Stock -155518000 -150715000 -137242000 -123131000TOTAL -91974000 -85202000 -67532000 -65511000

(values in 000's)

IBM ‘s long term debt and short term debt has been constant in last 3 years .

IBM is also buying back its shares in increasing amount to increase its Treasury Stock. IBM can play with this stock to generate money in short notice .

2. WORKING CAPITAL ANALYSIS

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Working capital can be divided into two categories: gross working capital and net working capital.

Gross working capitalGross working capital is a measure of a company's total financial resources. Gross working capital is calculated by totalling a company's current assets such as cash, short-term investments, accounts receivable, inventory, and marketable securities. Liabilities are not taken into account when determining a company's gross working capital, and in this regard, gross working capital only offers a limited picture of a company's financial standing.

Net working capitalNet working capital provides a much more thorough, comprehensive picture of a company's financial health. Net working capital is calculated by taking a company's total current assets and subtracting any current liabilities. Current liabilities include accounts payable, short-term debt, taxes, and employee salaries.

IBM Working Capital 12/31/2015 12/31/2014 12/31/2013 12/31/2012Gross Working CAPITAL =Total Current Assets 42504000 47377000 51350000 49433000Current Liabilities 34269000 39581000 40154000 43625000NET Working CAPITAL (Current Assets -Current Liabilites 8235000 7796000 11196000 5808000

(values in 000's)

Working Capital for IBM has increased if we see the CAGR for 5 years .

Operating Cycle –Gross and Net

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The operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods. This is useful for estimating the amount of working capital that a company will need in order to maintain or grow its business.

2015 2014 2013 2012Days Sales in Inventory (DSI)=(Inventory / Cost of Sales) * 365 Days 13.78851 16.54798 16.97 15.8961Days sales outstanding (DSO) =(Account Recievable/Total Credit Sales)*365 Days 36.3255 154.4652 70.100 90.3987Days payable outstanding (DPO)=(Accounts Payable / (cost of sales /number of days )) Days 149.2466 172.9001 152.33 156.334Gross operating cycle(DSI+DSO) Days 50.11404 171.0131 87.070 106.294Net operating cycle (CCC) Days -99.12 -1.88 -65.26 -50

The net operating cycle involves determining how long it takes to create inventory, sell inventory and collect on invoices to customers.

We observe that CCC is negative for all the years .This is because it gives money quite late to its vendors .Being a major player in IT , it can command late payment of its dues .

Excel Sheet Analysis

Please find the detailed excel sheet analysis.

Q3. Estimate the return on stock based on -:

1> Estimate the stock return –arithmetic mean and geometric mean taking past 12 months closing price data ?

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Excel Function Used are =Average and =GeoMean

ii ) One Year Holding Period

Rate of return for 1 year = Column Value G2 = 5.6 %

HPR = [1+.056]-1 = 5.6%

iii) 5 Year Holding Period

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HPR for 5 Years = (1.08 *.96*.95*.87*.96) -1

= 0.82 -1

= --.18 %

C) Estimate the standard Deviation of Returns using one year or 52 week data

Calculated in Risk Returns One Year TAB ,Column H

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Q4 : Valuation of Stock :

i) Dividend Discount Method :

Expected Rate of Return = Expected Dividend Yield + Expected Growth Rate or Capital Gains Yield

Snap as on 8th July :

2015 2014

Common shares outstanding (in millions) 966 991

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International Business Machines Period Ending:

Expected in 2016 12/31/2015 12/31/2014 12/31/2013 12/31/2012

Net Income Applicable

to Common Shareholde

rs or Dividend

12,53,05,00,000

13,19,00,00,000

12,02,20,00,000

16,48,30,00,000

16,60,40,00,000

Common Stocks 55,92,51,00,0

0053,26,20,00,0

0052,66,60,00,0

0051,59,40,00,0

0050,11,00,00,0

00

Common shares

outstanding (in millions)

96,60,00,000 96,60,00,000 99,10,00,000 99,10,00,000 98,90,00,000

Per Share Dividend

(D1)13 14 12 17 17

Market Price of

Stock (P0) 154 138 160 188 192

Dividend Yield

0.0839799 0.0992170 0.0756119 0.0886746 0.0876464

Capital Gains Yield

0.1223659 -0.1422339 -0.1446393 -0.0207779

Expected Rate of Return

0.2063458 -0.0430169 -0.0690274 0.0678967

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Present Value of Operating Cash Flow

FCF = NOPAT - Net new investment in operating capital.

International Business Machines

Period Ending: Expected in 2016

12/31/2015

12/31/2014 12/31/2013 12/31/2

012

Sales7765395

08174100

09279300

0 983670001028740

00

Sales Growth Rate -0.05

-0.119103

812

-0.056665

345 -0.043810875Profit Margin (operating) =Net Income / Net Sales (revenue)

0.153295164

0.161363331

0.129557186 0.167566359

0.161401326

Operating Capital1615760

01700800

01686800

0 174850001958600

0

Operating Capital Growth Rate

0.007884752

0.008299739

-0.035287

389 -0.107270499

WACC 7.21TAX 30%Long Run FCF Growth RATE -8%

Free Cash Flows

Sales7765395

08174100

09279300

0 983670001028740

00Earnings Before Interest and Tax

15592350

16413000

20470000 20646000

22999000

NOPAT 1091464

51148910

01432900

0 144522001609930

0Net Operating Capital -3400050 -3579000 -3740000 -3623000 -

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Expenditures 4082000

FCF 7514595 79101001058900

0 108292001201730

0

FCF Growth Rate -0.05

-0.252988

951

-0.022180

771 -0.098865802

Present Value of FCF 915297.8

076963471.3

7641289768.

575 1319025.5791463739

.342

Terminal Year Firm Value

Value in 2016

Free Cash Flow Year -2016 7514595

TVFirm = FCF of 2016/(WACC -G)

Total Value of Firm in 2015

1030129.364

Firm Intrinsic Value PV of FCF (Years 2012 to 2016)

5951302.68

Terminal Value 6981432.

043

Total Corporate Value 1293273

4.72

Relative Valuation Techniques

Some of the most common and useful metrics to utilize in relative valuation include:

a) price to earnings ratiob) return on equityc) operating margind) enterprise valuee) price to free cash flow.

How ever we will look into p/e , p/cf ,p/bv ,p/sales

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Relative Ratios IBM Accenture HP Price to earnings ratio

11.63 19.44 6.4 Return on equity

0.92 0.51 0.31 Operating margin

18.67 13.5 5.11 Enterprise value= Market Capitalization + Debt -Cash 178.96B 93B 24.51BPrice to Cash Flow 10.09 21.85 4 Market Capitalization 148.5B 74.36 22.8

ii) Holding Pattern

Market Price of Stock 1 Year 2 Years 5 Years Infinity

154.8 5.60% 0.0368

-0.17736

1

IBM is on decline ,I will not recommend to hold this share till

infinity as of now

Taking a snapshot of IBM 5 Year past returns -:

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