Stocks

ModernGraham Valuation: Apple Inc. (AAPL)

moneyCompany 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 and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

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 (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $1,278
MG Opinion Undervalued
Value Based on 3% Growth $481
Value Based on 0% Growth $282
Market Implied Growth Rate 4.28%
Net Current Asset Value (NCAV) -$11.30
PEmg 17.07
Current Ratio 1.68
PB Ratio 4.12

Balance Sheet – 9/30/2013 

Current Assets $73,286,000,000
Current Liabilities $43,658,000,000
Total Debt $16,960,000,000
Total Assets $207,000,000,000
Intangible Assets $5,756,000,000
Total Liabilities $83,451,000,000
Outstanding Shares 899,210,000

Earnings Per Share

2013 $39.75
2012 $44.15
2011 $27.68
2010 $15.15
2009 $9.08
2008 $5.36
2007 $3.93
2006 $2.27
2005 $1.56
2004 $0.36
2003 $0.09
2002 $0.09

Earnings Per Share – Modern Graham 

2013 $33.18
2012 $26.70
2011 $16.06
2010 $9.22
2009 $5.65
2008 $3.52

Conclusion:

Apple Inc.’s earnings are just unbelievable, and the EPSmg (normalized earnings) have grown from $3.52 in 2008 to $33.18 in 2013.  That is astronomical growth, nearly doubling on average every year during the period.  Compare this to Microsoft (read the ModernGraham analysis here), a company whose earnings have been growing at a much slower pace and Intel (read the ModernGraham analysis here), another company that has grown much slower, and you will see why Apple’s growth is so special.  The company does not satisfy the Defensive Investor, however, by having a current ratio that is too low, a PB ratio that is too high, and a dividend history that is too short.  But from the eyes of the Enterprising Investor, this is a very attractive company, passing all of the Enterprising Investor’s requirements.  From a valuation perspective, the growth Apple has achieved is so high that the ModernGraham valuation model was forced to use its built in cap on a growth estimate.  After all, it would be foolish to assume that Apple will continue to grow at the pace it has over the last 10 years, but given the historical pace in earnings, it also seems that the market’s implied rate of 4.28% is significantly low and the company would appear to be undervalued.  As a result, Enterprising Investors should feel very comfortable in proceeding with further research into whether the company would be appropriate for their individual portfolios.

What do you think?  Do you agree that Apple Inc. is undervalued?  Is the company suitable only for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author held a long position in Apple Inc. at the time of publication and had no intention of liquidating that position within the next 72 hours.

Photo Credit:  Andrew Magill

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