Benjamin 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
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â 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)Â 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: Â 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. Â 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: Â Normally any speculative company is placed on an annual review schedule, but for now Apple will remain on a quarterly review schedule. Â 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.
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