Ok, the basic idea is a comparison of enterprise value to forecast 2006 sales versus profitability of 2005 sales. In other words, if you compare the EV/Forecasts Sales ratio in the numerator, and the trailing 12 months operating margin in the denominator, you get a number as follows:
IBM Ev to forecast sales = 1.26x
IBM 2005 operating margin = 13.3%
To make this ratio easier, I multiply the demonitor by 10x, and you get 1.26/1.33 = 0.95. That 0.95 is basically a comparison of forecast sales versus expected profitability of those sales. The lower the number, the lower the valuation.
If you make the same ratio comparison (EV to forecast sales / 10x trailing operating margin) for each tech stock in the S&P 500, only FISV and MOT are less expensive. The other 73 tech stocks in the S&P 500 have higher valuations on their sales.
Add on to this in IBM's case that 2006 operating income will be higher than 2005's due to the sale of the PC division last summer. Thus if the shares don't move the ratio will be even lower, making it the least S&P 500 stock on this metric.
My hunch is that as IBM reports 2006, and its operating margin is consitently higher than 2005 levels, it's shares will slowly increase in value. I don't think its an aggressive investment at all, but seems like a safe bet for those who want low risk and a reasonable return. I bought some Friday below $80, plan to hold it for a year (at least) and just see what happens. |
