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Apple Inc (AAPL) Investment Valuation

November 17th, 2013 Posted by Investment Valuation No Comment yet

The Apple Inc (APPL) company research is a written document and published for our readers to guide them with their investing and make better decisions as to what stocks to Buy.

Company Profile

Apple Inc (AAPL) is an American technology company, headquartered in Apple IncCupertino, California. AAPL manufactures, designs, and markets communication devices to consumers, businesses and also in government entities. It is the top information technology serving the globe. Steve Jobs, Steven Wozniak, and Ronald Wayne incorporated Apple Inc (AAPL) on January 3, 1977. After three months of incorporation, Wayne sold his shares for $800. Wozniak and Jobs were high school friends, both were interested in electronics.

How does the Company Make Money?  

Apple Inc. designs manufacture and market mobile communication and media devices, personal computers and portable digital music players and related accessories. The Company’s products and services include iPhone, iPad®, Mac, iPod, Apple Watch, Apple TV, iOS, OS X and watchOS operating systems, iCloud, Apple Pay.
   apple-inc-appl
The Company sells 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 also value-added resellers.

Who is Running the Business? 

Timothy Cook, Chief Executive Officer 

AAPL Timothy Cook

 

Historical Events
  • In August 2011, Tim was Apple’s Chief Operating Officer and was responsible for all of the company’s worldwide sales and operations, including end-to-end management of Apple’s supply chain, sales activities, and service and support in all markets and countries.
  • He also headed Apple’s Macintosh division and played a key role in the continued development of strategic reseller and supplier relationships, ensuring flexibility in response to an increasingly demanding marketplace.

Further,

  • Prior to joining Apple, Tim was vice president of Corporate Materials for Compaq and was responsible for procuring and managing all of Compaq’s product inventory.
  • Previous to his work at Compaq, Tim was the chief operating officer of the Reseller Division at Intelligent Electronics.
  • Tim also spent 12 years with IBM, most recently as director of North American Fulfillment where he led manufacturing and distribution functions for IBM’s Personal Computer Company in North and Latin America.
  • Tim earned an M.B.A. from Duke University, where he was a Fuqua Scholar and a Bachelor of Science degree in Industrial Engineering from Auburn University.

Peter Oppenheimer, Senior Vice President, and Chief Financial Officer 
AAPL Peter Oppenheimer

Peter Oppenheimer is Apple’s Senior Vice President and Chief Financial Officer. As CFO, Oppenheimer oversees the controller, treasury, investor relations, tax, information systems, internal audit and facilities functions. He reports to the CEO and serves on the company’s executive committee.

 

Historical Events

  • Oppenheimer started with Apple in 1996 as a controller for the Americas, and
  • in 1997 was promoted to vice president and Worldwide Sales controller and then to corporate controller.
  • Oppenheimer joined Apple from Automatic Data Processing (ADP), where he was CFO of one of the four strategic business units. In that capacity, he had responsibility for finance, MIS, administration, and the equipment leasing portfolio.

Further,

  • Prior to joining ADP, Oppenheimer spent six years in the Information Technology Consulting Practice with Coopers and Lybrand where he managed financial and systems engagements for clients in the insurance, telecommunications, transportation and banking industries.
  • Oppenheimer received a bachelors degree from California Polytechnic University, San Luis Obispo and an M.B.A. from the University of Santa Clara, both with honors.

Do you trust the people and are they competent?     

With Apple’s governance structure, the two senior officers, Timothy D. Cook, and Peter Oppenheimer have the ability to meet the standards of making business success through a high measure of responsibility.   For these reasons, I do trust them and they have the necessary skills and the ability for the success of Apple Inc.

Apple Inc Value Investing Guide

Apple Inc Balance Sheet

Liquidity and Solvency

In the financial analysis of a business, solvency can refer to how much liquidity a company has.  When referencing to the company’s ability to service debt, liquidity refers to the ability of the company to pay its short-term financial obligations, it also refers to the company’s capability to sell its assets quickly to raise funds. On the other hand, solvency is the company’s ability to meet its long-term financial obligations. A solvent company is one that owns more than it owes; in other words, its assets is higher than its liabilities.

AAPL Liquidity

Analysis

  • The table above shows that the current ratio of Apple Inc was averaging 1.89 or 1.89:1, this indicates that Apple Inc has $1.89 of current assets for every $1 of current liabilities.
  • On the other hand, the quick ratio was averaging 1.62 the rule of thumb is 1. This indicates that Apple has enough liquid resources to pay the short-term debt. In other words, it shows the capability of Apple to meet short-term financial obligations.
  • Going forward, the solvency ratio is the capability of the company to meet its long-term financial obligations.  Apple has a 2.58 solvency ratio in 2012 and 2013.  It indicates that debt exceeds equity by more than twice.

Apple Inc Income Statement

Profitability    

Gross profit margin is a measure of profitability indicating how much of every dollar of profit is left over after deducting the cost of goods sold. While net profit margin is the percentage of income remaining, after the operating expenses, interest, taxes and preferred stock dividends have been deducted from gross profit.

AAPL ProfitabilityAnalysis

  • Apple’s gross margin and net margin was averaging 39.85 and 22.59 percent, respectively, this shows good profit margins. It also indicates the financial success and viability of Apple’s products and services.
  • Net margins measure the percentage of revenue that was left after deducting all of the expenses of the company. Same as how much cash was earned during a certain period.
  • To sum it up, it indicates that Apple Inc is financially sound and efficient in generating sufficient revenue for its business operation.

Apple Inc Cash Flow Statement    

AAPL CF

The Cash Flow Margin measures the efficiency of a company to convert its sales into cash.

  • The cash flow margin was averaging 0.30 or 30 percent. Cash flow margin is cash from operating activities as a percentage of sales.   The formula was cash from operating activities over total sales.
  • Moreover, Apple’s free cash flow was averaging $31.0 million. It tells us that the company was able to generate cash for future investments.

Apple Inc Investment Valuation 

The following model of equity valuation adopts the investment style of Benjamin Graham, the father of value investing. In essence, Graham said, any investment should be worth more than the investor has to pay for it.  Graham’s valuation looks for undervalued companies whose stock price is lesser than the cost.

AAPL Graham

Explanation

  • The sustainable growth rate (SGR) was averaging 38.75 percent, this is the maximum rate that Apple could grow limited to using its own generated revenue and without using additional funds from creditors or investors. In other words, it is the maximum rate that Apple can sustain its operation internally. SGR also measures the profitability of the company by comparing net income and shareholders equity. According to Investopedia, SGR is a good measure to plan long-term growth, actual acquisitions, cash flow projections, and borrowing strategies.
  • Moreover, the calculated margin of safety using the Benjamin Graham method was 86 percent in 2013 trailing twelve months. In other words, it passed Graham’s requirement of at least 40-50 percent below the intrinsic value or the true value of the stock. The margin of safety provides an allowance against errors in the analysis or calculation, hence there is a different style in calculating an intrinsic value that can impact the result of the margin of safety.
  • In addition, the market price to date, November 13, 2013, was $520.01 per share with $467.9 billion market capitalization.

The Relative Valuation Methods   

The relative valuation methods for valuing a stock is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.
AAPL Relative

Explanation

Let us understand what the relative valuation tells us.

  • The book value per share was averaging $95.06, in 2013, rise to $137.32, and the growth of 291 percent in five years.
  • While the Price to Earnings ratio was averaging $15.17, this is the price that the investors are willing to pay for Apple’s earnings.
  • In addition, earnings per share were averaging $29.26, this represents the company’s net earnings allocated to each share of common stock.
  • The return on equity was averaging 35.39 percent, this indicates how much profit Apple generates with the investment that the shareholders’ have invested.
  • Overall, it shows that Apple Inc was profitable.

Discounted Cash Flow Method   

The discounted cash flow analysis uses the free cash flow projections and discounts them to arrive at the present value.
AAPL DCF

Explanation

  • The discounted cash flow method shows that the present value of Apple’s equity was $1,012 per share and the total value was $943 billion.
  • The calculated future value was $2,341 per share with a total value of $2.1 trillion. This means, if you were to invest $1,012 today at a rate of 28 percent, you would have $2,341 at the end of six time periods or at the end of year 6. In other words, a future value of $2,341 is equal to a present value of $1,012. If you had a choice between taking an amount higher than the $1,012 today and taking the $2,341 at the end of six years, you should take the money today. Doing this, you would be able to invest at a higher amount at 28 percent for equal 6 years period, which would end up giving you more than $2,341.
  • The calculated net income for year 5 was $198 per share or $185 billion in total value.

Warren Buffett Approach

Totem also adopts the Warren Buffett method using the financial calculator in our equity selection.  The table below indicates a summary of the calculations.
AAPL Buffett

Explanation

Warren Buffett approach indicates that Apple Inc stock price was undervalued. In addition, the margin of safety or the value of appreciation was $404.83 per share. Furthermore, the value dividend was $236.33 per share, therefore, giving us a total value of $641.17 per share. Comparing $641.17 with the market price of $520.56, November 13, 2013, shows that Apple Inc stock is undervalued. The price is undervalued because the market price is less than the total value.  Furthermore, the price that the investors are willing to pay was $2309.20 per dollar of earnings.

In Conclusion

The liquidity and solvency tests indicate that Apple Inc was financially stable and sound. While the profitability ratios and also the cash flow margins tell us that AAPL was capable of generating sufficient revenue. The company has money left for paying dividends and for future investments. Furthermore, the margin of safety and the sustainable growth rate using the Graham method has acceptable results. In addition, the discounted cash flow approach indicates a future value of $2,341 per share. When it comes to Warren Buffett method, it shows that Apple Inc stock is trading at an undervalued price.  Therefore, I recommend a BUY on Apple Inc stock.

CITATION

Researched and Written by Criselda

Twitter: criseldarome

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Research Reports can be found under the company tab.