IBM Raises Its FCF Outlook for 2025

Worldwide Enterprise Machines Corp. (IBM) reported on Oct. 22 its highest adjusted free money circulate (FCF) margin (i.e., FCF/income) in its historical past at 15% for the year-to-date ending Sept. 30. Furthermore, IBM raised its full-year outlook for FCF, which may push IBM inventory at the least 10% greater at $345.00 per share.

IBM inventory closed Monday, Oct. 27, at $313.09, up from a current low of $275.97 on Oct. 16. (i.e., +13.5%).

Traders are possible happy that administration raised its full-year 2025 adj. FCF outlook to $14 billion, up from its projection of $13.5 billion for 2025 in Q2.

It makes a big quantity of its full-year FCF in This autumn, as its YTD adj. FCF was solely $7.181 billion, implying $6.189 billion (i.e., $14b – $7.181b YTD Q3) anticipated for This autumn. Final 12 months’s This autumn adj. FCF was $6.163 billion. That means a slight enhance this This autumn.

It additionally implies a full-year 20.9% FCF margin, as analysts are projecting $67.02 billion in income for 2025 (i.e., $14.0b / $67.02 billion).

Furthermore, primarily based on analysts’ forecasts for 2026, its full-year FCF may rise even additional.

For instance, assuming it makes a 21% adj. FCF margin subsequent 12 months, and utilizing analysts’ forecasts of $70 billion in income:

0.21 x $70 billion = $14.7 billion FCF for 2026

FCF Yield Goal Worth. That might result in the next inventory value, primarily based on its historic FCF yield metric.

For instance, the trailing 12-month (TTM) adj. FCF has been 4.56% (i.e., $13.344 billion TTM / $292.656 billion market cap).

So, if we assume that in 2026, with the adj. FCF estimate of $14.7 billion and the 4.56% FCF yield, the market cap may rise to $322.4 billion:

$14.7 billion / 0.0456 = $322.4 billion

That’s 10.2% greater than as we speak’s market cap of $292.656 billion.

In different phrases, IBM inventory may rise over 10% over the following 12 months to $345 per share:

$313.09 x 1.102 = $345.00

Analysts Agree.  Yahoo! Finance studies that 20 analysts have a mean value goal of $313.09. Furthermore, AnaChart.com studies that 11 analysts have a mean goal of $345.69. That’s near my FCF yield-derived goal value.

The underside line is that IBM inventory appears low-cost primarily based on its sturdy FCF and analysts’ goal costs.

One approach to play IBM is to promote quick out-of-the-money (OTM) put choices for a decrease buy-in value and to generate additional earnings.

For instance, the Nov. 28 choices expiration interval reveals that the $300.00 strike value put possibility has a midpoint premium of $6.57. Which means a short-seller of those places could make a direct yield of 2.19%:

$6.57/$300.00 = 0.0219 = 2.19% one-month yield

This reveals that the strike value is 4% beneath Monday’s value – i.e., it is out-of-the-money. However, even when IBM inventory falls 4% to $300.00 and the short-seller’s collateral of $30,000 per contract is assigned to purchase 100 shares, the breakeven level continues to be decrease:

$300.00 – $6.57 = $293.43 breakeven

$293.43 B/E / $313.09 buying and selling value -1 = -6.23% draw back safety

The purpose is that by shorting the $300.00 put possibility, the investor has a possible buy-in 6.23% decrease than the buying and selling value as we speak.

Within the meantime, the investor makes a 2.19% yield monthly whereas ready for this decrease potential buy-in level.

Furthermore, even when that happens, the upside is sort of good:

$345 goal / $293.43 breakeven -1 = 0.1758 = +17.6% upside

The underside line is that IBM inventory seems to be undervalued right here, and one approach to capitalize on that is to promote out-of-the-money places.

On the date of publication, Mark R. Hake, CFA didn’t have (both instantly or not directly) positions in any of the securities talked about on this article. All info and knowledge on this article is solely for informational functions. This text was initially revealed on Barchart.com