Latepost Apple: News, Noise In Addition To Value
As has been the representative for much of the final 2 years, the Apple earnings written report on Apr 24, 2013 was a media event, previewed endlessly on investment sites, covered heavily past times the media in addition to tweeted nigh past times both Apple fans in addition to foes. While I seek to rest away from the hype roughly earnings reports, this is a adept occasion to revisit my before posts on Apple, in addition to particularly the one I made at the start of this yr on its valuation.
The Signal amidst the Noise
Intrinsic value impact
In my post from the terminate of final year, I had reported on andistribution of values inwards a afterwards post. Given that at that spot receive got been 2 earnings reports since, I decided to revisit that valuation. In add-on to updating the company's numbers (all of the numbers except leases) to reverberate the trailing 12 months (through March 31, 2013), I every bit good incorporated the data from the most recent earnings reports to update my forecasts on 3 variables inwards particular:
The cyberspace effect of these changes is that the value per portion that I obtain for Apple is nigh $588, nigh 3.5% lower than the value of $609 that I estimated inwards early on January. You tin sack download the spreadsheet amongst my valuation of Apple. Again, brand your ain judgments in addition to come upwards to your ain conclusions. If y'all are in addition to so inclined, drib dead to the Google shared spreadsheet and larn inwards your estimates of value.
If y'all are concerned nigh whether borrowing $50 billion volition lay Apple inwards danger of beingness over levered, I did brand an assessment of how much debt Apple could borrow, past times looking at the effects of the added debt on the costs of equity, debt in addition to capital, amongst the objective beingness a lower cost of capital. I seek to endure realistic inwards my estimates of cost of equity (adjusting it upwards every bit a companionship borrows more) in addition to the cost of debt (by coming upwards amongst a prospective rating at each dollar debt degree in addition to cost of debt at each debt ratio). If Apple tin sack maintain its existing operating income, its debt capacity is huge ($200 billion plus) but even allowing for a halving of their operating income, it has debt capacity inwards excess of $100 billion. As amongst the valuation spreadsheet, y'all are welcome to download my upper-case missive of the alphabet construction spreadsheet for Apple in addition to play amongst they numbers.
Clear in addition to acquaint dangers
Given the cost collapse over the final few months, it would endure foolhardy non to stress exam the numbers inwards this valuation. In the commencement laid of tests, I went dorsum to the discounted cash menstruation valuation in addition to computed my suspension fifty-fifty numbers for growth, operating margins in addition to cost of capital, changing each of these variables, belongings all else constant. The tabular array below lists the electrical flow numbers for Apple for these variables, my estimates in addition to the suspension fifty-fifty that yields today's stock cost ($420 on Apr 28, 2013).
Holding all else constant, Apple's revenues would receive got to turn down 5% a yr for the adjacent v years to justify a value per portion of $420. Similarly, the pre-tax operating margin would receive got to drib to 12% from 30% today, belongings the other variables at base of operations representative levels, to larn to the same price. As an investor inwards Apple, at that spot seems to endure plenty of buffer built in, at to the lowest degree at electrical flow stock prices.
Will Apple drib dead the agency of Dell in addition to Microsoft?
As a technology scientific discipline firm, though, your concerns may endure nigh the companionship hitting a cliff in addition to essentially either losing value or becoming a value trap. In particular, y'all may endure worried that Apple may follow inwards the footsteps of 2 technology scientific discipline giants that receive got had problem delivering value to stockholders inwards the final decade. One is Dell Computers, where Michael Dell's attempts to rediscover growth receive got failed in addition to the companionship is at nowadays facing a to a greater extent than levered, depression growth future. The other is Microsoft, a less dire case, but a stock that hitting its peak nigh a decade agone in addition to has plateaued since. Can Apple endure "Delled" or "Microsofted"?
To endure Delled: What awaits a companionship when it's product/service becomes a commodity in addition to it operates at a cost disadvantage.
Dell was an success story inwards the growing PC trace of piece of employment organisation through much of the belatedly 1990s in addition to the early on part of the final decade. As the marketplace for PCs grew, Dell used its cost advantages over Compaq, IBM in addition to HP to brand itself the most profitable actor inwards the market. What's changed? First, the marketplace for PCs hitting a growth wall, every bit consumers turned to tablets in addition to other connected devices. Second, PCs became a commodity, only every bit Dell lost its cost payoff to Lenovo in addition to other lower cost manufacturers. With Apple, the peril is that their biggest in addition to most profitable business, smartphones, may endure heading inwards that direction. Unlike Dell, though, Apple is to a greater extent than than a hardware manufacturer in addition to it's success at premium pricing inwards the PC trace of piece of employment organisation is indicative of the pricing ability that comes from creating the operating organisation that runs the hardware. I believe that the jeopardy of Apple beingness Delled is small.
To endure Microsofted: The destiny of a business that has a profitable, cash-cow product(s) but runs depression on imagination/creativity.
Riding the success of Windows in addition to Office, Microsoft became the largest marketplace cap companionship nigh a decade ago. Like Apple, it seemed unstoppable. So, what happened? From the market's perspective, the companionship seemed to run out of imagination in addition to inventiveness in addition to investors got tired of waiting for the adjacent large hitting in addition to moved on. Note, though, that piece the stock cost in addition to marketplace capitalization receive got non moved much over the final 10 years, the companionship has returned billions inwards cash to its stockholders. Could this value stagnation hand off to Apple? Yes, but to me (and I receive got never been shy nigh my Apple bias), at that spot are is a large divergence betwixt the companies. One is that I don't think that Microsoft lost its imagination in addition to creative impulses a decade ago. I don't think it always had any. While Windows nor Office were workmanlike in addition to professional person products, neither tin sack always endure called elegant or creative (and I utter every bit a heavy user of Office products). Apple, on the other hand, has created iconic products through the decades, some less successful than others (remember the Newton), in addition to I uncovering it hard to believe that those creative juices only dried upwards final September.
Buy or Sell? Hold or Fold?
If Apple was beingness priced every bit a high growth stock, amongst sustained margins in addition to on the expectations of "big" novel hits inwards the future, I would endure worried nigh the final earnings report. It is not. As y'all tin sack come across from the suspension fifty-fifty tabular array inwards the final section, it is being priced every bit a depression growth, declining margin company, amongst no bang-up hits to come. I uncovering it striking that the same investors who receive got priced the stock on this the world react to incremental intelligence on these items (growth, margins, novel products), every bit if they had non already priced it in.
As I come across it, if I receive got Apple inwards my portfolio at $420 in addition to the companionship continues to disappoint on every dimension (growth, margins, novel products), I volition receive got a irksome stock that delivers billions inwards earnings in addition to pays a solid dividend. However, if the companionship surprises past times stopping margin leakage in addition to increasing revenue growth inwards the smartphone marketplace or past times introducing the iWatch or the iTV, it volition endure icing on my investment cake. In a market, where my choice investments are richly priced, Apple looks similar a winner, to me. It stays inwards my portfolio, the cost disappointments of the final few months notwithstanding.
My before posts on Apple
The Signal amidst the Noise
One of the most hard parts of beingness an investor inwards Apple has drib dead dealing amongst the cacophony of rumors, stories in addition to intelligence releases that seem to permeate the day-to-day coverage of the stock. Not alone exercise we, every bit investors, receive got to determine whether at that spot is truth to a story but nosotros every bit good receive got to evaluate its demeanor on on value (and indirectly on whether to drib dead on belongings the stock). To maintain my perspective, every bit I read these stories, I drib dead dorsum to basics in addition to depict on my “financial residuum sheet” stance of a company. While it resembles an accounting residuum canvass inwards wide terms, it is dissimilar on 2 dimensions. First, it is a frontwards looking in addition to value based assessment of a company, rather than beingness backward looking in addition to historical cost based. Second, it is flexible plenty to allow me to tape the potential for time to come growth every bit an asset, thence giving businesses credit for value that they may create inwards the time to come from growth. In real wide terms, hither is what Apple’s fiscal residuum canvass looked similar only before the most recent earnings report:
There is cypher surprising nigh this residuum canvass but it brings together much of what has happened to the companionship betwixt Apr 2012 in addition to Apr 2013. During the year, the companionship has drib dead increasingly subject upon its smartphone business, accounting for 60% of revenues in addition to fifty-fifty to a greater extent than of operating income, generating immense amounts of cash for the companionship (with the cash residuum climbing $50 billion over the course of pedagogy of the yr to hitting $145 billion). During the course of pedagogy of the year, nosotros receive got seen a slowing of revenue growth in addition to pressure level on margins, both of which receive got contributed to declining stock prices. The other large alter over the course of pedagogy of the yr is that the value of growth potential (from unspecified time to come products) has faded, at to the lowest degree inwards the market’s eyes, in addition to this is reflected inwards the turn down of $200 billion inwards marketplace value over the final nine months.
The Last Earnings Report (April 23, 2013)
The most recent earnings written report contained a mix of adept intelligence on the fiscal front end (cash in addition to financing mix) in addition to bad or neutral intelligence on the operating property front. Using the same framework that I used inwards the final section, hither is how I parsed the intelligence inwards the report:
First, inwards the no intelligence category, revenue growth is no longer inwards the double digits in addition to smartphones drib dead on to increment their portion of overall revenues & operating income. Well, nosotros knew that already in addition to the revenue growth was good inside the expected bounds. Second, the bad intelligence is that margins are shrinking faster than nosotros expected them to, though I larn the feel that Apple is understating its margins (by moving some expenses forward) in addition to its guidance for the time to come amongst the intent of getting ahead of the expectations game. Third, inwards nigh term bad news, the fact at that spot is no cite of whatever novel products or breakthroughs suggests that at that spot volition endure no revolutionary production proclamation (iWatch, iTV, iWhatever) inwards the adjacent quarter. However, if y'all are a long term investor, it is mildly disappointing that it looks similar that at that spot volition endure no blockbuster announcements inwards the adjacent 3 months but it is clearly non the terminate of the world.
On the fiscal side, at that spot was substantial news, much of which I think is positive.
- Cash provide to stockholders: The determination to determination to provide nigh $100 billion to a greater extent than inwards cash to stockholders inwards buybacks in addition to dividends past times 2015 has to endure viewed every bit vindication for those (like David Einhorn) who receive got tilt that Apple should endure explicit nigh its time to come plans for cash in addition to that it should distribute a large chunk cash amongst stockholders.
- Buybacks versus Dividends: In a fleck of a surprise, the cash provide volition endure to a greater extent than inwards the cast of buybacks than dividends. I, for one, am on board amongst that determination because hiking the dividends farther volition essentially brand this stock a "dividend" play, amongst an investor base of operations that volition lay dividend growth inwards the time to come ahead of all other considerations. If Apple wants to retain the selection of entering a novel in addition to possibly to a greater extent than upper-case missive of the alphabet intensive trace of piece of employment organisation inwards the future, it is ameliorate positioned every bit a lawsuit of this decision.
- Debt coming? In an fifty-fifty bigger surprise, Apple has opened the door to taking on conventional debt. While the details are even in addition to so fuzzy in addition to the initial bond number may endure for alone nigh $10 billion, it seems probable that the debt issued volition grow beyond that amount. To those who would accept number amongst this decision, tilt that Apple does non involve to borrow amongst all of its cash reserves, y'all may endure missing the argue why this debt volition add together to value. If the merchandise off on debt is that y'all weigh the taxation benefits of debt against the bankruptcy cost, at that spot tin sack endure no tilt against the fact that borrowing coin volition add together value for stockholders. To those who experience that it is inwards some agency immoral or unethical, based upon the declaration that Apple is sheltering its unusual income from additional USA taxes piece claiming a taxation deduction for involvement expenses, I would endure to a greater extent than inclined to nous to y'all if y'all showed me convincing proof that y'all brand mortgage involvement payments every yr but did non claim the mortgage taxation deduction inwards your taxation returns, because y'all think that it deprives the treasury of much needed revenue. The USA taxation code is an abomination, amongst its handling of unusual income every bit exhibit 1, but to inquire Apple (and its stockholders) to pay the cost for the taxation code's failures makes lilliputian feel to me.
In summary, the cyberspace effect of the earnings written report is negative on operating cash flows (with the declining margins) but positive on the fiscal side (with whatever discount on cash dissipating, every bit a final result of the cash provide announcement, in addition to the taxation benefits from debt augmenting value).
Intrinsic value impact
In my post from the terminate of final year, I had reported on andistribution of values inwards a afterwards post. Given that at that spot receive got been 2 earnings reports since, I decided to revisit that valuation. In add-on to updating the company's numbers (all of the numbers except leases) to reverberate the trailing 12 months (through March 31, 2013), I every bit good incorporated the data from the most recent earnings reports to update my forecasts on 3 variables inwards particular:
- Revenue growth: As the contest inwards the smartphone trace of piece of employment organisation continues to increase, I am inclined to lower my expected revenue growth charge per unit of measurement for the adjacent v years to 5% from my master copy approximate of 6%. While this is good below the revenue growth of 11.28% over the final yr (even using the final 'bad" quarter comparing to the same quarter the previous year), it is the prudent telephone phone to make, particularly inwards the absence of intelligence nigh novel products inwards the nigh term.
- Operating margin: I had projected a target pre-tax operating margin of 30% inwards my Dec 31, 2012, valuation, nigh 5% below the prevailing margin of 35.30% from the final annual written report (the 10K inwards September). The pre-tax operating margin has dropped to 30.92% inwards the trailing 12 months ending March 31, 2012, in addition to was nigh 29%, only inwards the final quarter. Since margins are coming downwards faster than expected, I lowered my target margin to 25%.
- Cost of capital: The cost of upper-case missive of the alphabet that I had used inwards my Dec 2012 valuation was 12.49% reflecting my expectation that Apple would rest an all equity funded theatre inwards the foreseeable future. The determination to purpose debt upends that procedure in addition to adding $50 billion inwards debt to the upper-case missive of the alphabet structure, piece buying dorsum $50 billion inwards stock raises the debt ratio inwards the cost of upper-case missive of the alphabet calculation to nigh 13%, piece lowering the cost of upper-case missive of the alphabet to nigh 11.29%.
The cyberspace effect of these changes is that the value per portion that I obtain for Apple is nigh $588, nigh 3.5% lower than the value of $609 that I estimated inwards early on January. You tin sack download the spreadsheet amongst my valuation of Apple. Again, brand your ain judgments in addition to come upwards to your ain conclusions. If y'all are in addition to so inclined, drib dead to the Google shared spreadsheet and larn inwards your estimates of value.
If y'all are concerned nigh whether borrowing $50 billion volition lay Apple inwards danger of beingness over levered, I did brand an assessment of how much debt Apple could borrow, past times looking at the effects of the added debt on the costs of equity, debt in addition to capital, amongst the objective beingness a lower cost of capital. I seek to endure realistic inwards my estimates of cost of equity (adjusting it upwards every bit a companionship borrows more) in addition to the cost of debt (by coming upwards amongst a prospective rating at each dollar debt degree in addition to cost of debt at each debt ratio). If Apple tin sack maintain its existing operating income, its debt capacity is huge ($200 billion plus) but even allowing for a halving of their operating income, it has debt capacity inwards excess of $100 billion. As amongst the valuation spreadsheet, y'all are welcome to download my upper-case missive of the alphabet construction spreadsheet for Apple in addition to play amongst they numbers.
Clear in addition to acquaint dangers
Given the cost collapse over the final few months, it would endure foolhardy non to stress exam the numbers inwards this valuation. In the commencement laid of tests, I went dorsum to the discounted cash menstruation valuation in addition to computed my suspension fifty-fifty numbers for growth, operating margins in addition to cost of capital, changing each of these variables, belongings all else constant. The tabular array below lists the electrical flow numbers for Apple for these variables, my estimates in addition to the suspension fifty-fifty that yields today's stock cost ($420 on Apr 28, 2013).
 |
Holding all else constant, Apple's revenues would receive got to turn down 5% a yr for the adjacent v years to justify a value per portion of $420. Similarly, the pre-tax operating margin would receive got to drib to 12% from 30% today, belongings the other variables at base of operations representative levels, to larn to the same price. As an investor inwards Apple, at that spot seems to endure plenty of buffer built in, at to the lowest degree at electrical flow stock prices.
Will Apple drib dead the agency of Dell in addition to Microsoft?
As a technology scientific discipline firm, though, your concerns may endure nigh the companionship hitting a cliff in addition to essentially either losing value or becoming a value trap. In particular, y'all may endure worried that Apple may follow inwards the footsteps of 2 technology scientific discipline giants that receive got had problem delivering value to stockholders inwards the final decade. One is Dell Computers, where Michael Dell's attempts to rediscover growth receive got failed in addition to the companionship is at nowadays facing a to a greater extent than levered, depression growth future. The other is Microsoft, a less dire case, but a stock that hitting its peak nigh a decade agone in addition to has plateaued since. Can Apple endure "Delled" or "Microsofted"?
To endure Delled: What awaits a companionship when it's product/service becomes a commodity in addition to it operates at a cost disadvantage.
Dell was an success story inwards the growing PC trace of piece of employment organisation through much of the belatedly 1990s in addition to the early on part of the final decade. As the marketplace for PCs grew, Dell used its cost advantages over Compaq, IBM in addition to HP to brand itself the most profitable actor inwards the market. What's changed? First, the marketplace for PCs hitting a growth wall, every bit consumers turned to tablets in addition to other connected devices. Second, PCs became a commodity, only every bit Dell lost its cost payoff to Lenovo in addition to other lower cost manufacturers. With Apple, the peril is that their biggest in addition to most profitable business, smartphones, may endure heading inwards that direction. Unlike Dell, though, Apple is to a greater extent than than a hardware manufacturer in addition to it's success at premium pricing inwards the PC trace of piece of employment organisation is indicative of the pricing ability that comes from creating the operating organisation that runs the hardware. I believe that the jeopardy of Apple beingness Delled is small.
To endure Microsofted: The destiny of a business that has a profitable, cash-cow product(s) but runs depression on imagination/creativity.
Riding the success of Windows in addition to Office, Microsoft became the largest marketplace cap companionship nigh a decade ago. Like Apple, it seemed unstoppable. So, what happened? From the market's perspective, the companionship seemed to run out of imagination in addition to inventiveness in addition to investors got tired of waiting for the adjacent large hitting in addition to moved on. Note, though, that piece the stock cost in addition to marketplace capitalization receive got non moved much over the final 10 years, the companionship has returned billions inwards cash to its stockholders. Could this value stagnation hand off to Apple? Yes, but to me (and I receive got never been shy nigh my Apple bias), at that spot are is a large divergence betwixt the companies. One is that I don't think that Microsoft lost its imagination in addition to creative impulses a decade ago. I don't think it always had any. While Windows nor Office were workmanlike in addition to professional person products, neither tin sack always endure called elegant or creative (and I utter every bit a heavy user of Office products). Apple, on the other hand, has created iconic products through the decades, some less successful than others (remember the Newton), in addition to I uncovering it hard to believe that those creative juices only dried upwards final September.
Buy or Sell? Hold or Fold?
If Apple was beingness priced every bit a high growth stock, amongst sustained margins in addition to on the expectations of "big" novel hits inwards the future, I would endure worried nigh the final earnings report. It is not. As y'all tin sack come across from the suspension fifty-fifty tabular array inwards the final section, it is being priced every bit a depression growth, declining margin company, amongst no bang-up hits to come. I uncovering it striking that the same investors who receive got priced the stock on this the world react to incremental intelligence on these items (growth, margins, novel products), every bit if they had non already priced it in.
As I come across it, if I receive got Apple inwards my portfolio at $420 in addition to the companionship continues to disappoint on every dimension (growth, margins, novel products), I volition receive got a irksome stock that delivers billions inwards earnings in addition to pays a solid dividend. However, if the companionship surprises past times stopping margin leakage in addition to increasing revenue growth inwards the smartphone marketplace or past times introducing the iWatch or the iTV, it volition endure icing on my investment cake. In a market, where my choice investments are richly priced, Apple looks similar a winner, to me. It stays inwards my portfolio, the cost disappointments of the final few months notwithstanding.
My before posts on Apple
- Apple: Thoughts on Bias, Value, Excess Cash & Dividends (March 1, 2012)
- Apple: Know when to concur 'em, know when to crimp 'em (April 3, 2012)
- Emotions, Intrinsic value in addition to Dividend Clienteles: The Apple postscript (April 6, 2012)
- Apple's Crown Jewel: Valuing the iPhone Franchise (August 29, 2012)
- Winning past times Losing: The ability of expectations (October 9, 2012)
- The Year inwards Review: Apple's Universe (December 27, 2012)
- Are y'all a value investor? Take the Apple exam (January 27, 2013)
- Market Mayhem: Lessons for Apple (January 31, 2013)
- Back to Apple: Thoughts on value, cost in addition to the confidence gap (February 7, 2013)
- Financial Alchemy: David Einhorn's value play for Apple (February 8, 2013)
0 Response to "Latepost Apple: News, Noise In Addition To Value"
Post a Comment