Posts Tagged ‘Apple Inc. (NASDAQ:AAPL)’


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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On October 25, 2001, Apple Inc. (Public, NASDAQ:AAPL) traded at a (split-adjusted) $9.15 per share. Fast-forward to yesterday’s close, and AAPL is a $247.01 stock. For those keeping score at home, that’s a lazy 2,600% in 8 1/2 years, or around 47% p.a. compound. And with a starting market capitalization of $5B, anyone could have put on the trade.

So what did AAPL look like in 2001? I don’t think it’s fair to cherry-pick a nine-year old article – I certainly hope no-one returns the favor for me nine years hence – so I’m only including this article from October 2001 for color and background:

Here is a breakdown of my analysis of Apple Computer — the good, the bad and the ugly.

Products: Don’t tell me about the dazzling products that Apple introduces from time to time. Because I’ll agree with you — they can be impressive. From the iMacs to the PowerBook to the new iPod portable MP3 player announced this week, it is clear that Apple knows how to design cool products.

Successful investors don’t invest in cool products, though — they invest in profits. In the past six years, against a backdrop of unparalleled profitability in tech, Apple was profitable in only three of those six years, despite a slew of provocative product introductions.

Business Model: It’s safe to say that the business model at Apple is terminally flawed. The PC industry has been completely commoditized. And Apple loses on price because machines based on Microsoft’s(MSFT) Windows are much cheaper. Apple also is a big loser compared with Windows based on the availability and breadth of applications.

To survive, Apple has to convince Windows users to migrate to the Mac platform. But since Apple is not competitive on either price or applications, there is no compelling reason for users to switch. The game is effectively over. Dell(DELL), IBM(IBM) and Hewlett Packard(HWP) have a stranglehold on the PC industry that is secure, with Dell’s build-to-order model the clear winner over the long term.

Balance Sheet: Fans of Apple stock can hail the financial strength of the company, but this is hardly a reason to buy its shares. Net of all debt (including off-balance sheet liabilities), Apple commands cash or near-cash (such as receivables) of about $7.80 a share. Interest income made up 42% of the profit in the year 2000 and is expected to contribute 50% of the pretax income in 2002.

But why should investors buy into a company with a deteriorating revenue base — sales are lower at Apple now than they were three, five and even 10 years ago — just so Steve Jobs can invest capital in short-term instruments that yield 3%? Large cash balances aren’t bad if they are accompanied by a value-creating business model that can use the cash for growth, but that’s not the case with Apple. It’s no wonder then that, assuming the company can meet earnings estimates, the return on shareholder equity in 2002 will be a paltry 3%.

Retail Stores: It’s desperation time in Cupertino, Calif., as Apple is going into the retail store business to ensure that its products receive enough attention. This move is fraught with problems, however, because the reason that Apple products are not getting the retailers’ attention is because they are not selling well. If Apple machines were moving fast off the shelves, retailers would be happy to provide the shelf space.

And the move into retail takes Apple into an area where it has demonstrated no competence. Now it’s going to take on Best Buy(BBY) and Circuit City(CC)? Have the executives at Apple considered the sobering retail experience of Gateway(GTW)?

It’s too bad for Apple that the ending to this chapter in the PC story has already been written. The company had the ultimate first-mover advantage many years ago with an array of better products, a vastly superior operating system and even the best commercials!

Apple’s story now is fodder for business historians — don’t make it fodder for your portfolio.

Would you have pulled the trigger on AAPL? The fact that it’s a tech stock, and the non-dominant player in the industry as well, makes this an easy pass for most of us, and therefore a sin of omission. The per share cash on the balance sheet, however, makes this an interesting situation to ponder:

Net of all debt (including off-balance sheet liabilities), Apple commands cash or near-cash (such as receivables) of about $7.80 a share.

At the start of 2003, AAPL could have been purchased for under $7.

Hat tip S.D. and Ben. One for you Dr.K.

[Full Disclosure: I do not hold a position in AAPL. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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