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Apple Inc. Quarterly Valuation – December 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 Most Undervalued Companies for the Defensive Investor – December 2014.  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.

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 = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  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 $111.62
MG Value $215.50
MG Opinion Undervalued
Value Based on 3% Growth $81.16
Value Based on 0% Growth $47.58
Market Implied Growth Rate 5.72%
Net Current Asset Value (NCAV) -$8.67
PEmg 19.94
Current Ratio 1.08
PB Ratio 5.98

Balance Sheet – September 2014

Current Assets $68,531,000,000
Current Liabilities $63,448,000,000
Total Debt $28,987,000,000
Total Assets $231,839,000,000
Intangible Assets $8,758,000,000
Total Liabilities $120,292,000,000
Outstanding Shares 5,972,100,000

Earnings Per Share

2014 $6.45
2013 $5.68
2012 $6.31
2011 $3.95
2010 $2.16
2009 $1.30
2008 $0.97
2007 $0.56
2006 $0.32
2005 $0.22
2004 $0.05

Earnings Per Share – ModernGraham

2014 $5.60
2013 $4.74
2012 $3.83
2011 $2.32
2010 $1.36
2009 $0.86

Dividend History

Conclusion:

Apple Inc. is a great company, but it currently does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, short dividend history, and high PB ratio while the Enterprising Investor is concerned with the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.36 in 2010 to an estimated $5.60 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 5.72% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out previous ModernGraham valuations of Apple Inc. (AAPL) for greater perspective!

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.

Disclaimer:  The author held a long position in Apple Inc. (AAPL) at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

Note to regular readers:  Normally any speculative company is placed on an annual review schedule, but for now Apple will remain on a quarterly review schedule.  Apple is one of my personal holdings (for now), and in light of the high level of cash levels the company holds, I prefer to keep a close eye on it to see if it returns to qualifying for the Enterprising Investor.

4 thoughts on “Apple Inc. Quarterly Valuation – December 2014 $AAPL

  1. How would one access risk with a company like Apple? Is it the point of the metrics to do so? I realize that the current ratio is currently insufficient to Pass Apple for the financial condition requirements, but I’m a bit baffled by the metrics chosen.

    Doesn’t Apple have more free cash flow than all of its outstanding debt? If I understood information from say, Gurufocus, correctly, then Apple could pay off all of its obligations within a year! How many companies can claim the same? I presume the reason Apple has accumulated debt is for its share repurchase program since they did not want to repatriate cash from overseas back to the US given the high corporate tax rates and a lack of reform for said tax rates.

    This site focuses on passing certain metrics for the Defensive or Enterprising Investor, but the one of the main concerns for any investor is the valuation – Apple certainly demonstrates an intrinsic valuation that surpasses any of its peers, and it happens to be one of the largest companies in the world!

    What then, would make Graham’s approach superior to say an approach purely concerned with intrinsic valuation? Is it a matter of accessing risk and financial condition? It seems to me that Apple (currently) is a no-brainer long-term (5+ years) investment, especially given the current continuing pullback in share price. If any information is available to indicate otherwise, I would appreciate it if someone pointed it out!

    Thank you!

  2. I agree with Andrei. Doesn’t Apple have more cash in it’s coffers than any other company in world? Or can we only consider the cash that’s on the US?

    1. It would make more sense to consider the cash the company has world-wide (at least when you’re trying to estimate intrinsic value), as the company’s performance is not just tied to the U.S. The stronger dollar will be a headwind for revenue (but considering Apple’s supplier base is mainly in Asia) it will also be a cost savings for OCOGs (cost of goods sold). So it will be interesting to see how the two balance out; hopefully the hedging contracts Apple has in place are well negotiated.

      I use a weighted average of a three-scenario (more conservative, conservative, aggressive) discounted EPS valuation model and a discounted Cash Flow model. So if my EPS models give me say 24% and my DCF model gives me 56% I weigh the two to get an overall number of 43%. But that is with a discount rate of 9.0% so I tack on a margin of safety of 55% on top of that prior to buying the shares. Unfortunately, Apple is currently 11% above my intrinsic value – margin of safety calculation. My question is: is 55% too conservative of a margin of safety?

      Modern Graham’s model/prediction does not seem to offer any answers regarding this (perhaps Graham does in his book though I have not read it). Given the rising interest rate environment in the second half of the year, I would appreciate a pull-back in the share price prior to buying more stock – but we will see!

  3. I was also surprised to see this statement for AAPL:

    “Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL”

    Other than that, caution was warranted and I guess BG and WB would not have invested in APPL… maybe now they would, at a much lower price

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