Apple: Trading on the Cheap

At Valuecruncher we have looked at Apple (AAPL) twice over the last six-months. In June, with the $AAPL share price at US$186.10, we produced a valuation of US$146.70. Then in September with the $AAPL share price at US$131.05 we had a valuation of US$163.98.

We are now in early-December and $AAPL has continued to head south - with the market generally. $AAPL is now trading at US$94.00 - just over half the price we first looked at in June. We felt it was time to revisit the valuation of $AAPL from an intrinsic value perspective - and most importantly the assumptions that we are using. We have also completed some high-level comparator analysis looking at the current price of $AAPL against some broad peers using a range of metrics.

Valuecruncher valuation model of $AAPL with interactive assumptions

Valuecruncher produces a valuation of US$109.55 for $AAPL. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 16.5% above the current share price of US$94.00.

Assumptions

• Revenue: Reuters aggregates 29 analysts covering $AAPL and the mean estimate of 2009 revenues is US$40.6 billion. For our analysis we have used US$36.5 billion in 2009, US$43.5 billion in 2010 and US$49.0 billion in 2011.
• Profitability: We have used an EBITDA margin of 19.0% to 2011. Reuters has $AAPL‘s EBITD margin at 20.8% last year and an average of 16.8% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$1.15 billion per annum moving forward.
• Discount Rate: 11.0%. In our June valuation we used a discount rate of 11.0% but dropped that to 10.0% in September. We believe 11.0% is a reasonable assumption in the current market conditions.
• Terminal Growth Rate: 4.0%. In our assumptions we have 2010/11 revenue growth at 12.6% - we have assumed that growth eventually slows to a 3.0% long-term stable growth rate.

Our analysis incorporates the cash on the $AAPL balance sheet – Valuecruncher calculates a net debt number.

Comparator Analysis

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. At Valuecruncher we have previously looked at comparator analysis. For $AAPL we looked at a range of broad peers. We calculated enterprise values - market capitalisation plus net debt (long-term borrowings less cash). Then we measured a range of metrics against the enterprise value for $AAPL and the peer set.

We have used the last financial year (LFY) as the base set of metrics. Of the peer group, EBAY and YHOO had rough LFY performance. The other numbers are interesting. The one that stands out a mile to us however is that $AAPL is currently trading at 7.0x last years free cash flow (FCF). Remove the cash and you can have the business for 7.0x last years FCF - no growth assumed. Wow - that looks cheap.

Using our valuation of US$109.55 that gives a EV/FCF multiple of 8.7x. That is still pretty reasonable compared to the peer set.

Play with our assumptions – what does your analysis say?

Disclosure: None.

Comments

[20smoney:]

ten reasons to buy apple now at 20smoney.com

2008 Dec 09 07:33 AM

[Roger Knights:]

One factor that I suspect has been weighing heavily on AAPL these past few months is the competitive threat from in-the-offing touch-screen smartphones from RIM, Google, etc. Many Wall-Streeters love their Blackberries and consider RIM a more professional and solid company than Apple. And they see Google as an 800-pound gorilla. So they probably figured that iPhone sales would be severely squeezed when those new devices arrived. And the report of a cut in iPhone parts-orders by Apple must have reinforced that way of looking at things.

So far, it looks as though the competitive touchscreen smartphones are not setting the world on fire and Apple's iPhone sales are holding up. In a month analysts will have a better feel for the situation. If it looks as though competitors haven't made much of a dent in iPhone sales, Apple-boosters like Munster will draw an analogy between them and the many unsuccessful competitors to the iPod. That ought to make an impression on many hedge-fund shorts, If they close out their large positions, the stock could/should rise 25%, even without a massive influx of aggressive buying.

An exciting product announcement at MacWorld Jan. 5 is a possible positive black swan. Ditto an unexpectedly positive earnings report three weeks later. So I think a rise to 125 in two months is likely (all other things being equal).

2008 Dec 09 10:32 AM

[bryanz:]

Aren't MacWorld and the WWDC are typically buy the rumor, sell the news events though? The idea of underpromise, overdeliver that Peter Oppenheimer subscribes plays havoc with the hearts and minds of analysts who gush over the numbers that are reported then - pardon me - crap their pants on the guidance. Until recently when AAPL actually started reporting the non-conforming revenue numbers that bundle in deferred revenues from iPhone sales, people had trouble figuring those numbers out.

I'm curious as to AAPL selling an iPhone in WMT and what that would do to the image of exclusivity and chic appeal that belongs to the AAPL brand. I understand that you can buy iPods anywhere. Can you buy a Mac at WMT though? It's an incredible distribution channel but the coffee shop set might be a little turned off by seeing their baby sold at the big boxers.

I like that the market dropped 240pts (ok I don't like "that") while AAPL managed to stay positive and actually break $100 again. Hopefully it can develop support at that level and push higher.

2008 Dec 10 05:28 AM