International Business Machines Corp. (NYSE:IBM) is not nearly as cheap as Microsoft, though. Instead of having a significant net cash position International Business Machines Corp. (NYSE:IBM), including pension obligations, has a net debt position of about $42 billion. This works out to $37 per share of debt, increasing the enterprise value significantly.
Owner earnings for 2012 were about $16.8 billion, or $15.12 per share. With shares trading around $196 the company’s enterprise value is 15.4 times owner earnings. This is greater than the current P/E ratio of 13.6 and much greater than the forward P/E ratio of about 11.6. Because of its debt International Business Machines Corp. (NYSE:IBM) is more expensive than it appears.
International Business Machines Corp. (NYSE:IBM) has had its own share of problems recently. After first quarter results came in weak CEO Virginia Rometty addressed the company’s employees via an internal video message. IBM had become too slow and unresponsive, she said, and the company needs to strive to adapt to a changing world more quickly. Microsoft has a similar problem, and both companies are slowly trying to correct it.
After the post-earnings decline Microsoft is even cheaper than Cisco Systems, Inc. (NASDAQ:CSCO). Cisco, like Microsoft, is highly profitable and has a lot of cash. At the end of April Cisco Systems, Inc. (NASDAQ:CSCO) had a net cash position of about $31 billion, or $5.78 per share. With TTM owner earnings of $2.12 per share the company’s enterprise value is 9.3 times the owner earnings. This is slightly higher than the multiple being assigned to Microsoft by the market.
Cisco Systems, Inc. (NASDAQ:CSCO) has faced slowing growth as it has transitioned from a growth company into a consistent dividend paying company, and years of unsuccessful acquisitions have wasted untold quantities of money. Cisco Systems, Inc. (NASDAQ:CSCO) recently sold Lynksys, the home networking business, for less than it originally paid as the company’s attempts to enter the consumer market have largely failed. However, Cisco Systems, Inc. (NASDAQ:CSCO) seems to have sharpened its focus as of late in regard to acquisitions. The $2.7 billion acquisition of cybersecurity firm Sourcefire is the latest for the company, and with the threat of hacking and cyberwarfare growing larger everyday Cisco Systems, Inc. (NASDAQ:CSCO) is positioning itself to be a leader in the cybersecurity market.
The bottom line
Microsoft, after an oversized reaction to what amounts to mediocre earnings, is trading at bargain levels. While the company is struggling with a declining PC market and lackluster mobile penetration its enterprise businesses are growing fast and stronger than ever. Microsoft has a lot of cash and is plenty profitable, and with the enterprise value just 9 times owner earnings it’s hard not to buy Microsoft at these prices.
The article A Big Tech Opportunity originally appeared on Fool.com and is written by Timothy Green.
Timothy Green owns shares of Microsoft and Cisco Systems (NASDAQ:CSCO). The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines. and Microsoft. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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