Saturday, 13 February 2016

Analysis of Apple 2016

Apple, an American design and technology company

Company: Apple 

ISIN US0378331005 | WKN 865985 

Business: An American technology and design company. They have products that they market very well. Their products are, in order of revenue: iPhone (major income source), iPad, Mac, iTunes, iPod. Watch.

Active: World Wide 

P/E: 10.3

This company was analysed due to a request posted on the Analysis Requests page.

Here you can find the previous analysis of Apple 2015.

contrarian values of P/E, P/B, ROE as well as dividend for Apple

The P/E for Apple is excellent with 10.3 but the P/B is high with 4.6 which gives a no go form Graham in the end. The earnings to sales are excellent with 34% and the ROE is superb with almost 45%. The book to debt ratio is so, so with 0.7.
In the last five years they have had a spectacular yearly revenue growth rate of 16.6% which gives us a motivated P/E of 35 to 40 which means that Apple is today highly undervalued by the market. (Should probably be noted that the five year growth for 2012 was 37%, for 2014 it was 23% and now in 2015 it was 17%).
The spend around 15% of their earnings on R&D which is low but since they are more a design company than a technology company I guess it is ok as it is. They are however increasing it substantially year by year.
They pay a tiny dividend of 2.1% which on the other hand represents only 22% of their earnings so there is room for improvement. They have massive share buyback programs running which I like to see when companies are traded at this P/E level.

Conclusion: Graham says no this time as he did the last time but I have become more and more open minded towards Apple. It is true as I have previously written about Apple that it is harder to double 40 billion earnings than what it is to double 4 billion but at a P/E of 10 I do not care that much. If the company only keep those earnings and earn back what i paid for them in 10 years them I am happy with the investment. The P/E is excellent, the ROE is excellent, the dividend in combination with share buyback program is excellent. I should have bought Apple when I made the first analysis back in 2013 when Graham almost said yes to them but since it is not possible to turn back time I will now instead say that I could buy Apple shares as the company looks today. 

If this analysis is outdated then you can request a new one.


John Magic said...

Thanks! One thing I wonder is, they spend 15 % on RnD and 22 % on dividend. What happens with the other 63 %? How much is share buy back?

Another thing, to what extent do you look into what on the books? P/B can differ a lot depending on how one writes the books. I guess Apple doesn't have a whole lot of tangible assets so maybe Graham's is not the best decision strategy, at least not for the design part of Apple.

Fredrik von Oberhausen said...

Hi John Magic!

You are welcome.

Hmmm... I see how it is possible to misunderstand what I mean with the R&D.

It is not taken in any way from the earnings since it is part of the normal operating costs. I only wanted, when the data is given, to show how much the different companies are spending on R&D and then I decided to take a look at that compared to their earnings... I could just have well have picked revenue. So... it is only to get a feeling and there are therefore no 22% taken from the earnings that goes into R&D in the sense that you probably thought.

So 22% goes to dividend. They when they started their share buyback program they said that they would buy back shares to a value of 200 billion USD and there is around 50 billion left to buy for. So it becomes a bit difficult to say how much that would correspond to from the earnings since that program has been running for two years (?) already and will run for one more if I remember correctly.

I look into the book but makes no separation in the analysis that I make. I take the values as they are presented and just push them in. I personally do these days take a very close look at the tangible and intangible values in the companies before I decide to make any buy but yeah... like I said I do not separate it in the analysis.

On the other hand... I have also seen tangible assets (and tangible assets increases) that were a dream made up of the company so today I pretty much trust neither very much but I am definitely more scared of intangibles.

Looking more specifically at Apple then I would say the opposite to what you say. They have very little intangible assets. almost no goodwill and they have not blown up the value of the Apple brand as an asset which they could have. They have a lot of money as cash and bonds etc. etc.

John Magic said...


Thanks for your reply. Cash is quite tangible, I agree about that. Actually I didn't look into Apples reports yet. I will do that though, as well as Intel's and IBM's. I have a hard time understanding the valuations of the IT giants. Ball park numbers (CF=cash flow):

AMZN 400 0.3% 5% 3%
FB 80 1.3 3% -
ARMH 40 2.5% 0.6% 2%
MSFT 35 3% 7% 3%
GOOG 30 3.5% 5% -
NVDA 24 4% 6% 2%
INTC 12 8% 13% 3.5%
IBM 10 10% 12% 4%
AAPL 10 10% 14% 2%

Hope the columns don't go crazy... Anyhow it's remarkable what people are willing to pay for some companies. Is Microsoft really likely to show such a spectacular growth compared to Apple?

What are people paying for in Amazon or Facebook?

Fredrik von Oberhausen said...

No, no, one can read them. Thanks!

Well, first off... good question! I hope that there are some other readers here that will be able to give their five cents on the matter.

As soon as Microsoft got their new CEO they stepped back saying that they would more or less only make software in the future. This almost directly increased the share price by probably over 50% if I remember correctly.

So... by the look of it... the "IT world" has been separated into hardware and software and the investors are putting a very different price tags on them. IBM, which is today actually only a software company... my thoughts are that average Joe have still not realised this and still have so hard built into their backbone that IBM is a hardware company which is why it is being traded at those low P/E values.

Qualcomm P/E 16 Div 3.9% has dropped from 80 down to 50 USD in the last 1.5 to 2 years... which is similar to what has happened to Apple.

So if IBM is odd in one direction then Amazon is odd in the other. For whatever reason Mr. Bezos are allowed to fool around with hardware as well as having large Amazon storages with a couple of billions in "hardware" so to say.

So... yeah... my five cents would be that the IT world is divided into hardware and software and with software the investor is still not able to forecast future earnings correctly which leads to pretty odd valuations with silly low demands on earnings which means the companies can out perform each quarter... leading to even higher silly valuation.

I hope someone else can give a better answer though.