IBM's Supersized Buyback

Despite all the talk of constriction in the credit markets, Wall Street's buyback binge continues: $600 million for Tiffany (NYSE: TIF  ) last month; close to a billion for General Dynamics (NYSE: GD  ) the month before that; $750 million for McAfee (NYSE: MFE  ) just a couple of weeks ago.

Now along comes IBM (NYSE: IBM  ) with a repurchase plan that dwarfs everyone else's: $15 billion -- fully $12 billion of which IBM "expects" to spend this year. But after we get over the shocking size of this latest buyback, two questions remain.

Can it pay?
Actually, yes. Turns out, IBM has $15 billion in its wallet right this instant (actually a bit more than that), and so could theoretically lay out the whole wad at any moment. Of course, that's not the game plan. IBM aims to take its time and buy shares "depending on market conditions," probably over the course of the whole year. According to the press release, IBM doesn't want to raid the kitty to repurchase shares, and rather "expects to use cash from operations for the repurchases."

(My guess, though, is that to hit $12 billion in repurchases this year, it will need to dip into savings at least a bit. Last year, the firm generated only about $10.6 billion in free cash flow, just shy of what it aims to spend on buybacks this year.)

Should it pay?
At the risk of making IBM investors feel Big Blue, I have to answer, "No." Or at least, "Not at this price." Take a look at how IBM's valuation stacks up against a few of its peers:

	P/E	Price-to-Free Cash Flow	Projected Growth Rate
IBM	16	15	11%
Hewlett-Packard (Nasdaq: HPQ  )	17	13	16%
Microsoft (Nasdaq: MSFT  )	16	13	11%
Electronic Data Systems (NYSE: EDS  )	14	7	11%

When I run the numbers, I just don't see today's share price as particularly compelling. IBM is as expensive as Microsoft on a PEG basis, and less attractive when valued on its free cash flow. Honestly, the more I look at these numbers, the more I think IBM is the most expensive of the bunch. (In contrast, EDS' valuation entices, and as I mentioned last week, HP is looking downright cheap.)

Foolish takeaway
Is IBM a superb business and a excellent generator of cash? No doubt. It's just not quite excellent enough to be worth buying at this level. IBM should keep its powder dry and wait for better prices before putting its money where its press release is. So should you.