Intrinsic Value = 4.95 x (8.5 + (2 x 10) x (4.40/5.76) = $107.77

IBM is currently trading at around $91, so it is currently slightly undervalued.

We can also do same calculation for IBM's average expected 2005 earnings of $5.62 in order to give some idea of what IBM's price should be if it meets those earnings estimates:

Intrinsic Value = 5.62 x (8.5 + (2 x 10) x (4.40/5.76) = $122.36

Of course this calculation is somewhat subjective when considered on its own. It should never be used in isolation - we must always take into account other factors such as debt/equity, cash flow, management effectiveness, prevailing economic conditions, etc. Investors should seek some qualifying criteria such as a PEG (Price Earnings Growth) ratio of less than 1 in additon to stock being undervalued based on trailing and forward intrinsic value. Be aware that PEG itself is also based on future expectations, so we have to have some degree of certainty that company will meet those expectations. We can do this by looking at last 5 years growth rate and Earnings figures.

There are, of course, other methods of calculating intrinsic value but this is certainly one of simplest.

(c) 2005 The Graham Investor - Intelligent Value Investing You may use this article, as-is, provided this copyright notice is kept intact.

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