We wrote an article for the April issue of Value Investing Letter giving an overview of Quantitative Value, discussing the quantitative value model outlined in the book, and applying it to Apple Inc. (AAPL). It’s been smashed up since then, and there was also some big news yesterday — which is that AAPL is going to return $100 billion to its shareholders by the end of 2015 — so I’m highlighting it here. To put that $100 billion capital return in context, AAPL closed Tuesday with a market capitalization of $380 billion. Incredibly, its $145 billion cash pile won’t shrink because the new buyback brings its return of capital up to about the level of its current free cash flow. Weirdly, it’s now regarded as the “animal investors like least: a slow-growing tech stock.” From our earlier article:
We ran our model on March 13, 2013, finding Apple Inc. (AAPL) to be one of the highest quality stocks in the bargain bin. AAPL designs, manufactures and markets a variety of mobile devices, including the iPhone, iPad, and iPod, along with Mac products, operating systems, cloud products, related software and services, and many other products. Its devices are ubiquitous, and are catnip to consumers, driving one of the most valuable brands in the world. Why has the company shed over a third of its market capitalization since peaking near $700 per share in September of 2012?
In short, this former hedge fund darling has become the company that everyone loves to hate. iPod and Mac sales are down from last year. The media has pounced on reports of weakness in the sale of the iPhone 5 and now questions whether AAPL will be competitive with the newest smartphones. The market did not react well to AAPL’s latest earnings announcement, and dozens of analysts have reduced their price targets over the past few months. So what’s going on here? Is AAPL again headed for the technology dustbin of history? Or might this be a manifestation of investors’ behavioral bias?
Our model leads us to believe that AAPL offers exceptional franchise characteristics and is statistically cheap, with an EBIT/TEV yield of nearly 21 percent, which is among the very cheapest within the cheapest decile of stocks in the market. Below are some additional highlights from the quantitative output of our screens, which will give the reader a high-level view of the company’s profile, and then we will dig deeper on some details. Clearly, the fact that Mr. Market is offering us a company of this quality at this price should raise some questions.
AAPL Summary Statistics (As At March 13, 2013)
(Click to enlarge)
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No position.
Agreed – Apple is severely undervalued. My own write-up:
http://klarmanite.com/ideas/?page=2
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I wrote a similar article on Seeking Alpha a couple of days ago. I understand that there is anxiety about margins and the product pipeline, but Apple doesn’t have to do much of anything to justify a higher price except prove that they’re not completely irrelevant. Their margins could drop another 10% and still be arguably underpriced. I guess it will take positive signs from the sale their next iPhone to convince the Street that Apple isn’t dead in the water.
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Agreed. The beauty of deep value: the stocks just need to survive to be good investments.
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Thank you for this writeup and for your great book!
I have a quick question about your calculation of TEV. In this article your TEV is $265b, which looks like the straightforward “market cap ($402b)+ debt (zero in this case) – cash ( $137b, some in current cash & eq. and some long term investments, in this case) + pref (zero) + minority interest (zero)”
In your book you define the cash portion of TEV a little differently, as “excess cash” or “cash + current assets – current liabilities” which I think would give you a TEV of $279.
So for aapl, the difference is small, but for other companies it may be larger.
My question is, do you prefer to use for a systematic basis? AAPL is a little quirky with a very large chunk of what most analysts would consider cash in “long term investments”…would you consider “LT investments” to be included with cash on a systematic basis?
Thanks!
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