Apple Inc. Quarterly Valuation – June 2014 $AAPL

500px-Apple_logo_black.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor Near 52 Week Lows.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Apple Inc. (AAPL) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Apple Inc. (Apple) designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. The Company’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, and a variety of accessory, service and support offerings. The Company also delivers digital content and applications through the iTunes Store, App StoreSM, iBookstoreSM, and Mac App Store. The Company distributes its products worldwide through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. In February 2012, the Company acquired app-search engine Chomp.

AAPL Chart

AAPL data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $93.86
MG Value $210.75
MG Opinion Undervalued
Value Based on 3% Growth $79.37
Value Based on 0% Growth $46.53
Market Implied Growth Rate 4.32%
Net Current Asset Value (NCAV) -$2.53
PEmg 17.15
Current Ratio 1.63
PB Ratio 4.71

Balance Sheet – 3/29/2014

Current Assets $70,541,000,000
Current Liabilities $43,208,000,000
Total Debt $16,962,000,000
Total Assets $205,989,000,000
Intangible Assets $5,983,000,000
Total Liabilities $85,810,000,000
Outstanding Shares 6,032,220,000

Earnings Per Share

2014 (estimate) $6.08
2013 $5.68
2012 $6.31
2011 $3.95
2010 $2.16
2009 $1.30
2008 $0.77
2007 $0.56
2006 $0.32
2005 $0.22
2004 $0.05

Earnings Per Share – ModernGraham

2014 (estimate) $5.47
2013 $4.74
2012 $3.81
2011 $2.29
2010 $1.32
2009 $0.81

Dividend History

AAPL Dividend Chart

AAPL Dividend data by YCharts

Conclusion:

Apple is a very strong company for Enterprising Investors to explore, but the Defensive Investor has concerns with the low current ratio, lack of a long enough dividend record, and the high PB ratio.  The company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Microsoft Corp (MSFT) and ModernGraham’s valuation of Google (GOOG).  From a valuation side of things, the company appears significantly undervalued after growing its EPSmg (normalized earnings) from $1.32 in 2010 to an estimated $5.47 for 2014.  This strong level of demonstrated growth outpaces the market’s implied estimate of 4.32% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Apple Inc. (AAPL)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Be sure to review the previous ModernGraham Valuations of Apple Inc. (AAPL)!

Disclaimer:  The author held a long position in Apple Inc. (AAPL) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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3 comments for “Apple Inc. Quarterly Valuation – June 2014 $AAPL

  1. Joe Cenzoprano
    June 12, 2014 at 3:12 pm

    AAPL is not sufficiently strong financially………what? They have 150b sitting on the balance sheet. Can you explain, you are along on the planet with that opinion.

    • June 12, 2014 at 3:36 pm

      Joe,

      The Defensive Investor’s requirement is based on the current assets and current liabilities as expressly reported on the company’s balance sheet. In Apple’s case, that does not amount to a high enough current ratio.

      In any event, even if you were to give Apple a pass in that category, it still would not be suitable for the Defensive Investor due to the short dividend history and high PB ratio.

      • Joseph Cenzoprano
        June 12, 2014 at 4:46 pm

        I’m enterprising anyway….. Way to strict, the Defensive.

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