Is IBM Worth $200 a Share?

Analysts like what they're hearing from IBM (NYSE: IBM  ) . Big Blue reiterated its goal of increasing operating earnings to $20 a share on $20 billion in revenue in this week's confab with Wall Street.

Upgrades came fast and furious following the meeting -- but one analyst was more impressed than the rest. Chris Whitmore of Deutsche Bank raised his price target to $200 a share. Most others kept their forecasts closer to $180 a share, Bloomberg reports.

Is Whitmore nuts? Not at all. Today, my own back-of-the napkin discounted cash flow analysis says that if IBM improves cash flow by 10% a year over the next five years, and then by just 3% thereafter, it's worth $218. In my opinion, Whitmore's downright conservative.

So is the rest of the Street. Despite expensive acquisitions, neither Dell (Nasdaq: DELL  ) nor Hewlett-Packard (NYSE: HPQ  ) has figured out how to dethrone Big Blue from its global leadership in the delivery of tech-centric professional services.

Last quarter, the company booked a 16% gain in per-share earnings on a 7% increase in revenue, after accounting for currency effects. IBM also ended 2010 with $142 billion in booked professional services work. That's roughly 25 times the revenue peer Infosys (Nasdaq: INFY  ) produced over the last 12 months.

To be fair, a good portion of IBM's earnings growth will come from cost reductions and using excess cash to repurchase shares. You know what? I don't care. Big Blue has a long history of excellent capital allocation.

Since being named CEO, Sam Palmisano and his team have increased IBM's returns on capital every single year -- from 9.9% in 2002 to 24.8% in 2010. Name a group that's done better, and I'll show you a stock worth buying. Chances are you won't, which brings us back to IBM. So long as this team is in charge, the stock's worth at least $200 a share.

Do you agree? Disagree? Let us know what you think about IBM's prospects, strategy, and valuation using the comments box below.

You can also rate IBM in Motley Fool CAPS and keep tabs on the company by adding the stock to the My Watchlist tool, our free, personalized stock tracking service.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of IBM at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of IBM and is also on Twitter as @TheMotleyFool. Its disclosure policy won't be bought at any price.


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