Monday, April 22, 2013

Analysis of Apple

An American giant working with design of technical products

Company: Apple

Business: It is classified as a technology company that are making sales of various products such as iPod, iPad, iPhone, mac etc. They are selling complete solutions with physical product, operating system as well as software.

Active: They are active world wide as the American giant they are.

P/E: 8.8 


 
The P/E of Apple is very low with the current 8.8. This comes from two reasons. The stock price has dropped like a stone since last summer and their earnings have completely exploded during the last couple of years. The P/B value is not very good with its 3.1 which leads to a little bit too high value of 27.5 according to Grahams formula. However it is fully acceptable. They have an excellent earnings per sale of 27% and the book to debt is also excellent. During the last five years the growth has been 37% which is very high and unsustainable to maintain. According to Lynch and Graham the motivated P/E for such a fast growing company is well above 80, well above! And that means that the current P/E of 8.8 is very low. They are spending only 8% of their earnings on R&D. First I thought that this was due to the very high earnings but when looking also at the real number the R&D costs are low. Why is this? How can it be that they spend only 1/3 of that Intel or Microsoft spends on R&D in real numbers? My conclusion was that this is because Apple is not a real technology company and should not be looked upon as such. They are a design company that are making the wrapping on the gift but the goodie inside comes from other sources. With this approach they technologically does not even have to try to stay ahead of any competitor and just buy the best product for them and their current application that already exists on the market and put that inside their wrapping. The question is how to value them when they are a design company and what to compare them with? One can see with for instance the mac that they sometimes failed in the design but then a year afterwards they "corrected" that mistakes. This is very different from a tech company that has spent 5-10 years developing something that in the end turns out not to be superior to their competitors products. Anyhow...they pay very bad dividends which is almost nothing from their last year earnings.

Conclusion: The formulas are telling that it should be a buy and especially now since these massive drops. However... I will not. The reason why I will not is because their growth is not sustainable. You can not double 41 billion earnings to 82 billion. It is just not financially possible in this world and even though the stock is cheap what do I get out? I get no dividends. I only see a flattening out or drop in earnings with a resulting decreased or maybe an inflation based yearly growth which will then also not motivate a high stock price. I want more potential profits from a company that I own and not a potential profit that is based on stock price increases. If the dividends would be kicked up then I would find it slightly more interesting to own Apple but today it is not of interest to me. I do however understand if someone follows the formula and buy it and also if people will speculate on the stock price because it is a great company with excellent earnings!

1 comment:

Fredrik von Oberhausen said...

The made a 1 to 7 split of the shares.