Apple (AAPL) has had a rough time lately, closing Friday at $439.88, a price nearly 40% below its recent high and only a bit more than three times balance sheet cash. The rap on AAPL seems to be that its days as a "growth stock" may be over and that it may be about to join Microsoft (MSFT) and Cisco (CSCO) in the ranks of mature tech companies stuck at low multiples.
Watching recent market action, I decided to do a "worst reasonably possible case" analysis on AAPL as a gut check. I thought it would be interesting to do a pro forma on a "no growth" version of AAPL and to try to estimate what this "no growth" AAPL would be worth. I have assumed that AAPL stops growing and continues to earn at the level it reached in fiscal 2012. I have also assumed that all numbers move up with domestic inflation at 2% per year.
Because I put a great deal of emphasis on owner cash flow (cash flow available for dividends and share repurchases), I have taken a close look at various accounts which affect cash flow. The owner cash flow number can be derived by deducting capital expenditures (CAPEX) from "cash from operations" and represents the cash that the business actually throws off for investors. I have assumed that "no growth" AAPL, having achieved a "steady state" of operation, has no changes in accounts receivable, inventory or accounts payable from year to year. When a company is growing, these accounts tend to grow from year to year but they should remain relatively constant in a "no growth" environment. I have also assumed that total CAPEX spending declines to be equal to depreciation and amortization. This is true for many of the mature tech companies, several of which tend to have depreciation accounts which are actually larger than CAPEX.
The table below compares AAPL's actual 2012 results with pro forma "no growth" results. I have presented only the accounts which I believe would change materially and I have indicated the impact of the changes. In 2012, accounts receivable increased by $7.0 billion resulting in a reduction in cash flow; accounts payable increased by $4.5 billion resulting in an increase in cash flow but the net result of the two changes was negative to cash flow. In 2012, total CAPEX (acquisitions as well as expenditures) was $9.7 billion - well in excess of depreciation and amortization ($3.3 billion). In the pro forma, there are no increases in accounts receivable or accounts payable and CAPEX is reduced to a level equal with depreciation and amortization ($3.3 billion). All data is based upon AAPL's 2012 annual report.
|Net Income||A/R ADJ.||A/P ADJ.||CAPEX ADJ.||OWNER CASH GENERATED|
|AAPL Pro Forma||$41.7B||0||0||-$3.3B||$50.0B|
The "Owner Cash" number is not derived by simply applying the adjustments in the table to the "Net Income" number; there are a number of other adjustments (share based compensation, deferred revenue, etc.) which must be made. Because I have assumed that there would be no change in any of these other adjustments in moving from the 2012 numbers to the pro forma numbers, they are not presented.
Growth actually costs money and it tends to reduce cash flow. This is not really surprising. Opening new stores, building up inventories and accounts receivable, and investing in product development all take money and these expenditures tend to be reduced in a "no growth" environment. I managed a regional office for a law firm and we used cash basis accounting. Our growth years were some of our most difficult because we were spending cash "filling the pipeline" by paying for staff to bill hours in year one for which we would not actually receive cash until year two. So, from a cash flow perspective, growth is a mixed blessing. Of course, I would rather see AAPL grow, but, if you are going to assume "no growth" in income, you should understand the implications of "no growth" for cash flow.
The "no growth" version of AAPL presented in the pro forma would throw off a lot of cash. Since no major investments would be anticipated, AAPL could increase its dividend and get more aggressive about share repurchases. I have assumed that AAPL would increase its dividend to $24 a share and repurchase enough stock (at a price of $600 per share) to offset options (about 8 million shares a year) and reduce share count by 2% per year (19 million shares). The table below sets forth the disposition of the pro forma AAPL cash flow based upon its most recent diluted share count of 947 million shares.
|Owner Cash Flow||Dividends||Stock Repurchases||Increase in Cash|
|AAPL Pro Forma||$50.0B||$22.7B||$16.2B||$11.1B|
AAPL could even continue CAPEX at the 2012 levels and still have roughly $5 billion in extra cash at the end of the year. And AAPL would not have to touch the $145 per share in cash that it holds right now.
"No growth" AAPL would see gross revenue grow 2% per year (due to inflation) and would see share count decline 2% a year; this would produce a 4% per year increase in income per share. The dividend could be raised about 4% (one dollar) each year as well. A $24 per share dividend secured by a huge and growing amount of balance sheet cash would be very, very attractive to dividend investors and would easily support a $600 share price, at which level the dividend yield would be 4%. AAPL's price earnings ratio would be a little less than 15, but, with balance sheet cash backed out, it would be a bit more than 11. The large and increasing dividend would likely prevent the price from dipping much below $600 but, if it did, the share repurchases would be less expensive.
So, AAPL's current price certainly doesn't assume any growth at all and, indeed, a much higher price could be justified consistent with no growth. I, for one, think AAPL will continue to grow but it is comforting to know that this powerful cash flow machine could be aimed in the direction of dividend investors and could thus support a much higher price. Of course, it is possible that AAPL will not only not grow, but will actually shrink, in which case the numbers would look worse. But is that really more likely than continued growth? Top line year over year growth in the most recent quarter was very, very healthy and AAPL has lots of room to grow in markets outside the United States.
I bought some AAPL at a split adjusted price of $15 a share when my teenage son and daughter both told me about this new thing called the iPod. I have been buying on dips ever since. Maybe I have imbibed the Kool Aid here but the numbers support a continued long position in AAPL.