Valuation analysis for International Business Machines Corp. (NYSE:IBM)

July 30, 2015, 13:15 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Excessive valuation arguably became initially evident in International Business Machines Corp. (NYSE:IBM) in March of 2014, and that still exists and is expected to remain even though PE Multiples have come down. 

Our analysis begins with an obvious conclusion given the deteriorating revenues IBM has seen since late 2013.  When revenues decline natural pressure is levied on EPS Growth.

IBM is no exception to the rule.  EPS growth for IBM experienced a material decline into negative territory eventually after late 2013.  Currently yearly EPS growth is -2.58% and that is expected to remain negative in 2015, although improve slightly to 0.54%.  Further improvement is expected in 2016 where EPS growth is expected to be 3.18%.

Not surprisingly, as deterioration in revenue and EPS growth occurred the PE multiple came down.  The PE for IBM declined from near 15x in 2012 to under 10x, where it is now.  At first glance, when compared to the market, IBM looks cheap on a PE basis, but that does not paint the entire picture.

In order to determine fair value we must compare the PE to the EPS Growth, and when we do we can see just how out of whack valuation for IBM became once Revenue and EPS growth began to deteriorate.  The problem is, although valuation is expected to rebound from being significantly negative to positive again in Calendar 2016, the PEG ratio is expected to be above 3 even after 2016 is over.

Our evaluation of PEG ratio valuation levels suggests that fair value exists when a stock trades with a PEG between 0 and 1.5, so a PEG of 3 is far beyond fair value.  We must conclude, as a result, that IBM, unless the shares fall meaningfully, will continue to look overvalued and we would avoid it.

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