In this article I will analyze International Business Machines Corp. Stock known as IBM based in its earning per Share (EPS) and its Price/Earning (P/E) ratio.
First, we need to see how was IBM EPS doing in the last six years. By browsing IBM’s EPS for the last years , I found that IBM’s EPS dropped from 11.95 $ in 2017 until it reached the bottom 1.36 $ in 2022 as shown below:
That means the growth rate of IBM for its EPS will be negative and we cannot rely on it.
Let us now see how was the sales for IBM did during the same period of time from 2017 until 2022 as shown below:
Also here we cannot estimated the growth rate of the sales since its dropped from 82.91 Billion in year 2017 until it reached 66.72 Billion in year 2022 which will provide us with negative growth rate which is not applicable.
Note: its worth to say that IBM sales in year 2017 is less than its sales in 2018, however, its EPS in 2017 is higher than the one in year 2018, that make us believe that the company applied some cost cutting policy in 2017 in order to generate high EPS rather than increasing its sales, which might lead to think that this policy will always used by the management to increase profit, which is not good policy to use in order to generate profit, because at the end the company will be stuck with costs that cannot be cut which will lead to drop in company’s EPS as seen above when the EPS dropped until it reached 1.36$ .
Now that we cannot use EPS or Sales in order to calculate the growth rate, the last thing that we going to examine is the book value and see if we can end up with measurable growth rate.
As shown in the above graph the book value for IBM is fluctuated from 2017 where it was 21.34 per share, until it reached to 22.28 per share in 2022. That means there is slight positive change which will allow us to estimate the growth rate which is 0.87%, which is really so tiny percent that we end up with.
Now we will estimate IBM’s book value in year 2027 to see how much will it be by applying the following equation:
- Where PV = IBM book value in year 2022 = 22.08 $
- i = growth rate of IBM’s book value estimated above = 0.87%
- n = years of investment = 5 years in 2027
By plug in the data that we mentioned above in the formula, we end up with projected Book value for IBM in 2027 which is 23.06$ per share.
Second, that we have IBM projected book value for year 2027 which is 23.06$, all what we have to do is to find the lowest (P/B) ratio for IBM in the last six years, and as we said in the previous analysis we are looking for the lowest (P/B) ratio because we are conservative investors.
The lowest (P/B) ratio for IBM for the last six years was 4.07 which was in year 2020.
Finally, all what we have to do is to multiply the (P/B) ratio that mentioned above to the projected IBM’s book value for year 2027 to find the price of IBM stock in year 2027 which is as following:
IBM’s Stock Price In 2027 = (23.06)*(4.01)= 92.47$
As discussed above, IBM has negative growth rate in both EPS as well as Sales, which means the company cannot be validated as a good investment, and based in its book value growth rate, I projected its stock price in 2027 which will be 92.47$. Bottom line, if an investor put 10,000$ in IBM and buy its share today price 140.16$, she will end up losing 3,402$ or 34% of her capital.