The overvalued company of the week is Apple Computer, Inc. (APPL) the computer manufacturer that has exploded in growth following the cult like status of their iPod MP3 player. As always we will analyze using Warren Buffet’s approach for the Business and Management Review as well use Benjamin Graham’s method of valuing the company.
Business and Management Review
1) Is the business simple and understandable
Apple’s business is simple when looking at the marketing and product’s it produces. Apple manufactures and distributes personal computing devices as well the iPod. I specified the iPod because truly it is the only reason why anyone over the past three years has paid any attention to the company. The iPod is the cornerstone of Apple and the product that saved the company from its continued decline. Their personal computing devices historically have been more of a novelty and niche device used in certain trades including graphic design and music production. However, the business is simple to understand as it sells consumer products and accessories both directly (modeling Dell) and through retailers (modeling traditional computer companies).
The actual design and production of the products is complicated and is beyond the scope of the investor, but we can eliminate this concern as the company is large enough to assume their internal hiring is bringing in intelligent individuals in that field of expertise.
2) Does the business have a consistent operating history?
This is where Apple has performed extremely poorly. As mentioned before the iPod, Apple was on a downward spiral as it maintained a fraction of marketshare (some estimates below 10%) of the personal computing market. It was not until the iPod and the mere brilliance in marketing and advertising that propelled Apple into the starlight it enjoys currently.
3) Does the business have favorable long term prospects?
Apple has peaked out in our opinion and will see new companies enter the market of portable MP3 music players in the future. Apple has attempted to lock in iPod users and convert them into Apple computer users, but this seems to not taken off as anticipated. For example over this summer Apple was offering a free iPod with any laptop purchase by college students. We feel that once Apple sees sales decline due to price competition, Apple’s earnings will drop significantly and the company will be back in the same position it was in the pre-iPod world (See Forbes article relating).
4) Is management rational?
Steve Jobs (bio) has done a remarkable job with marketing the Apple name and that can never be taken away from the man. However, it is unfortunate that Apple has resisted the calling to open up the company to allow the computing sector to have access to the programming codes in order to create more consumer software that is compatible with Apple. Recently, however, Apple finally allowed their computers to run both Apple operating system and Microsoft Windows, but this is too little too late in creating a lasting image of user friendly to the novice computer. Further Apple retail presence has been a strange journey in of itself. For instance for the longest time iPod’s where not available at traditional retail stores such as Best Buy and Circuit City. Further still the computers are only available either online or through a corporate Apple boutique store which is far and few between in terms of location.
5) Is management candid with its shareholders?
Apple has a fairly typical investor relation page with traditional information you would expect. The site includes stock price, corporate governance, Q&A, calendar, and contact information for investors. It is somewhat hidden however as on the main page one must enter through the media relation tab at the bottom of the home screen.
6) Does management resist the institutional imperative?
Here Apple truly does act responsibly, as corporate officers have been known to take pay cuts with the rank and file employees during hard times. Apple has been a leader as well in giving computers to educators in underprivileged neighborhoods. Apple still maintains the “cool” working environment that other companies including Google (GOOG) have come to appreciate and mimic.
Financial and Value Review
Upon our review, we found Apple to be severely overpriced and unsuitable for either the defensive or enterprising investor. Its current price to earnings ratio is 115.42 which is extremely high for either investor. The company pays no dividend which altogether eliminates the defensive investor. We find the stock to be trading at over 230% of its intrinsic value.
We find an appropriate buy price to be $24/share.
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