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.
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