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stock has soared almost 50% in a month, bolstered by a spreading belief that the tech behemoth has weathered the IT spending slump. But a hard look at the company's just-reported cash flow data suggests that IBM's business may not be as sturdy as Wall Street thinks, leaving the stock vulnerable to a steep drop.

Among savvy investors, measures of cash flow -- the amount of actual greenbacks generated by ongoing operations -- have supplanted earnings as the favored method of analyzing IBM's financial performance. Both bulls and bears see cash flow as the cleanest way of gauging the fortunes of a large and complex company that has a relatively opaque income statement. Earnings numbers, by contrast, can be obscured by the presence of numerous noncash items.

The drawback is that there are many ways to calculate cash flows, and IBM's fans and skeptics fall out over what should or shouldn't be included in cash flows. In July, Detox

reached a number for IBM's core cash flows and concluded that the company's stock, then trading way below current levels at $68, was substantially overvalued.

To arrive at a well-scrubbed cash flow calculation, investors need the sort of numbers that IBM reports only quarterly in its filings with the

Securities and Exchange Commission

. The filing for the third quarter came out Monday -- and cash flows still look too low for Tuesday's closing stock price of $81.68.

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In short, IBM appears to have the ability to make between $3.40 and $3.90 annually in so-called free cash flow. If the stock were to trade at 15 times $3.90, it would have a price of $59, which is 28% below current levels.

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But how to get to this free cash flow number? The starting point is cash flow from operations, which totaled $14.3 billion in the 12 months ended Sept. 30. Typically, free cash flow calculations then subtract capital spending on plant and equipments and products like software. In IBM's case, these items come to a total of $4.4 billion, producing a free cash flow number of $9.87 billion in the 12-month period -- an impressive-seeming figure.

Indeed, IBM's CFO John Joyce was justified in pointing to the positive contribution to cash flows made in the third quarter by improvements in working capital, which is money used to provide near-term funding to operations. For example, on the third-quarter conference call, Joyce pointed out: "Inventory now stands at our long-term low for the company."

However, when businesses slow down, they nearly always throw off cash. Moreover, the operating cash flow number contains a large boost from a decline in loans that IBM makes to clients to buy its equipment and services. While the third-quarter cash flow statement does not break out cash flows from the decline in finance receivables, balance sheet numbers suggest a $2.62 billion boost from a downward movement in this item over the 12 months.

Reducing these loans does boost cash, but arguably, it's not really a gauge of how operations are doing. IBM borrows much of the money it lends on, meaning a reduction in finance receivables will mainly be used to pay off its borrowings. And paying off loans is a cash outflow that doesn't appear in the operating cash flow statement. Subtracting the $2.6 billion takes free cash flow down to $7.25 billion, or $4.23 per share.


But we can't stop there, if we're trying to reach a normalized number for 2003. Detox is assuming that cash flow from operations in 2003, excluding finance receivables movements, will be close to the number for the 12 months ended Sept. 30. Capex and software spending will likely be lower, but the reduction there will be more than offset by contributions to its pension fund and by undisclosed cash outflows to cover merger costs.

IBM expects to make $1.5 billion of contributions to the company's pension plan to better balance its assets and liabilities. The company declined to say over what period that contribution will be made. If it's one year, that would take free cash flow down to $5.75 billion, or $3.35 per share. But if it did $500 million per year over the next three years, it would mean $3.94 per share of cash flows.

Finally, a cash outflow buried in the acquisitions segment of the cash flow statement should also be included in any self-respecting free cash flow calculation. Of course, spending on acquisitions doesn't get included in free cash flow analysis, but the acquisitions number does include something called purchase accounting liabilities for merger costs. These are merger costs that accounting rules allow companies to capitalize, which is accountant-speak for placing on the balance sheet instead of the income statement.

The company declined to provide a number for these capitalized costs, but they could have been substantial on IBM's recent $3.5 billion acquisition of PwC Consulting.