Is it time to buy Apple?
Opdateret: 7 dage siden
This is my second post about the FAANG stocks. In this analysis I will look at Apple and decide if it is a company worth investing in and at what price.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
Personally, I do only own one Apple product, which is a MacBook. It is my second MacBook and I have been very pleased with the products. However, this analysis will be objective and me liking their products will not influence my results.
Apple is a multinational technology company that is headquartered in California. I do not want to go too much into details about the company as I expect that everyone already knows it. Instead, I would like to investigate their moats. I do believe that they have several moats. The most obvious moat is the brand moat, as it is a very well-known brand that consumers trust. I also believe that they have a secret moat, as they have several patents. The last moat that Apple has is a switching moat. In case all your products are Apple products, it is such a big part of the consumer's life that it isn't worth switching to a competitor. Later we will investigate the numbers but let us first have a look at their management.
Their CEO is Tim Cook. Before arriving at Apple, he worked in IBM and Compaq until 1998 where Steve Jobs asked Tim Cook to join Apple, where he started as Senior Vice President for worldwide operations. His educational background is a Bachelor of Science in industrial engineering and a Master of Business Administration. Since he has become the CEO, he has done a great job. Apple has doubled in revenue and profit and the company's market value has been driven up fivefold. Looking at employee satisfaction Apple consistently ranks highly on lists of "best tech companies to work for" and Tim Cook consistently scores over 91 % on employee approval ratings. I haven't been able to find much criticism about Tim Cook, however I have read that people are a bit disappointed of him not being more like Steve Jobs, and that he lacks a lot of enthusiasm and a little innovation. I don't think it is fair to compare Tim Cook with Steve Jobs though, as very few people are like Steve Jobs were.
We have determined that Apple has a brand, secret and switching moats. We really do like the management as well. Now let us investigate the big five numbers to see if Apple does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. Apple shows remarkable good numbers, as they are way above the required numbers and growing from benchmark to benchmark. It would be hard to find a company with a better historical ROIC than Apple.
The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. The numbers are all above the required 10 % in all the benchmarks, which is wonderful to see. The one-year benchmark is a bit different from the others, but it is because it was during the pandemic, so I wouldn't put too much importance on that one.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Once again, Apple delivers great numbers as they are well above the requirements. As mentioned previously, I wouldn't give too much attention to the one-year benchmark.
The Equity Growth Rate does not meet our expectations. When looking at the numbers, it is the first time that Apple disappoints. They only meet the requirement in the one-year benchmark, and as that was during the pandemic, you cannot really give it any importance. I was a bit surprised to see that Apple doesn't have a better equity growth rate.
Finally, we investigate the Cash Growth Rates. In general, the numbers look good. There are a few benchmarks, where they are just below the required 10 % but I still find them acceptable. If we ignore the one-year benchmark, it seems like the cash growth rate is always hoovering around the 10 %, which is something that any investor should be happy about.
To shortly summarize the five numbers from Apple. The ROIC is by far the most important numbers, and it is nothing less than fantastic. A company with a ROIC like Apple is a company that anyone would be happy to invest in. Looking at the growth rates, it is obvious that last year was an odd year out, so I won't give it any importance. Historically, the sales growth rate and EPS growth rate deliver solid growth with more than 10 % in each benchmark. The cash growth rate has some benchmarks just below the 10 % but in general the numbers are acceptable. I was a bit surprised to see such as bad equity growth rate but taking the other numbers into mind, it is not alarming. All in all, I would be very happy to invest in a company that deliver numbers as Apple does.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation in Apple, I can see that Apple has 1,15 years earnings in debt, which is acceptable.
Obviously, Apple is a great company, and it will most likely continue to grow due to their innovation and because of their strong moats. However, you will need to ask yourself about how much and how fast a $2 Trillion company can grow, especially if there will be some new legislation due to the 499-page long report by the antitrust subcommittee of the House Judiciary Committee. If we see some new legislation or not might come down to the senatorial election in Georgia. Another risk is the lawsuit that Epic Games filed against Apple, which might end up in Apple needing to lower their 30 % commission on all app related sales.
All right, we have gone through the numbers, potential and risk regarding Apple, and now it is time for us to calculate a price for Apple. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a EPS at 5 (it is lower than the last year but higher than it has been historically). I chose a Estimated future EPS growth rate of 12,5 (which is a bit lower than what I used last year. I just find that 15 % is a bit high, considering the size of Apple), Estimated future PE 25 (which is the double of the growth rate, as the highest historical PE has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $100,34, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Apple at price of $50,17 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 104.038. The Capital Expenditures was 11.085. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 7.759,6 in our further calculations. The Tax Provision was 14.527. We have 17.340 outstanding shares. Hence, the calculation will be like this: (104.038 - 7.759,6 + 14.527) / 17.340 x 10 = $63,90 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 5,51 and a growth rate of 12,5 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $77,65.
I do believe that Apple is a great company with a great management. Even though they are facing some risks, I see the company as having a great growth potential. I will open a position in Apple if it hits the PAYBACK TIME price at $77.65. I know that Apple will most likely never fall to that price, meaning that I will probably never own Apple.
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