Like many investors, I read up on my positions as earnings approach. With IBM (NYSE:IBM) losing ground over the past few weeks, Yahoo finance offered me a link to Barron's, where I found an article based on the work of Tony Sacconaghi, who has gained fame as a bear on IBM. Here's the gist of it:
While IBM trades at a seemingly reasonable P/FE earnings multiple (13x), we believe that EV/free cash flow is a better metric for valuing IT Hardware companies, and on that basis, IBM is more expensive (14.7x). More importantly, we believe that IBM's FCF (and to a lesser degree its earnings) was overstated in FY 16. (emphasis added)
Is IBM an IT Hardware Company?
Segment information is useful here. The Systems segment is 9.7% of revenue, and 6.3% of pre-tax margin. Cognitive Solutions, Global Business Services, and Tech Services and Cloud Platforms make up 88.3% of revenue, and 87.8% of pre-tax margin.
