International Business Machines's price surge today seems to be confirming the bullish analyst outlook on the stock. Ending the day at $266.56, IBM has posted 3.4% gains, pushing the valuation of the stock even higher. Might the stock be overvalued, despite its buy rating?
International Business Machines has a P/E ratio of 45.6 based on its 12 month trailing earnings per share of $5.85. Considering its future earnings estimates of $10.61 per share, the stock's forward P/E ratio is 25.1. In comparison, the average P/E ratio of the Technology sector is 30.44 and the average P/E ratio of the S&P 500 is 29.3.
We can also compare the ratio of International Business Machines's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present equity value -- or what is left over when we subtract its liabilities from its assets. IBM has a P/B ratio of 9.22, with any figure close to or below one indicating a potentially undervalued company.
A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. International Business Machines's quick ratio is 0.849. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.
The final element of our analysis will touch on International Business Machines's ability to generate cash for the benefit of its shareholders or for reinvesting in the business. For this, we look at the company's levered free cash flow, which is the sum of all incoming and outgoing cash flows, including the servicing of current debt and liabilities. International Business Machines has a free cash flow of $12.4 Billion, which it uses to pay its shareholders a 2.6% dividend.
At Market Inference, we will keep monitoring International Business Machines to see if the analysts were right to recommend the stock despite its valuation issues. We recognize that numbers don't always tell the whole story, and that qualitative factors often set high performing investments apart from the rest.
