Apple (NASDAQ:AAPL) has been the subject of dozens of bull and bear thesis articles on Seeking Alpha in recent months. The company went from the most valuable company in the history of this country at $650+ billion to "only" $400 billion today. There is much hysteria regarding how "cheap" Apple is on one side whereas the other says the waterfall decline is warranted. Putting opinions aside, we can use one measure of profitability and management effectiveness to objectively ascertain whether or not Apple's management is getting the most from the company's assets. The metric I will use to demonstrate this point is Economic Value Added.
If you are unfamiliar with EVA, the basic premise is that the company's asset base, which is defined as total assets minus current liabilities, gets "taxed" by the company's weighted average cost of capital. After-tax earnings must exceed this "taxed" amount in order to produce positive EVA. If EVA is negative, it means company management isn't producing enough income from the company's asset base to cover its economic cost of financing the assets.
First, we'll take a look at Apple's EVA as a percentage of the company's asset base. The data for these graphs were pulled from Apple's 10-Ks. In addition, when computing the company's WACC for each time period, I used 11% as the equity cost of financing. All other numbers were observed or computed using observed data.
What we see here is that back when Apple was a computer company (imagine that), management did a lousy job of making an economic profit. In fact, only in 1997, 1998 and 1999 did Apple actually turn an economic profit and even then, EVA only just crested zero. Subsequently, the company's economic profit dove back below the zero line to a nearly -10% EVA in 2000. As you can see, things began to really turn around when the iPod was introduced. Since then, EVA as a percentage of total assets has been on a very steady, very steep uptrend that is showing no signs of slowing down. In fact, when the iPhone was introduced, you can see a dip in EVA followed by a very strong surge to the 15% level we saw at the end of 2012.
This graph shows EVA as a nominal amount and the results are staggering.
We see that Apple's EVA has gone parabolic starting in 2008, just after the iPhone began to be widely adopted. In addition, following the iPad's release, EVA further steepened its climb to an EVA value of $26.6 billion in 2012. Keep in mind as you ponder that number that this is not gross profit; this is simply the amount of economic profit the company earned over its economic cost of capital. That is absolutely astounding and I'd be willing to wager such a number has never been seen before in the history of capital markets. Again, we see here that EVA is showing no signs of slowing down whatsoever.
Skeptics may say the easy money has been made for Apple and they might be right, but I wouldn't step in front of a company that is turning an economic profit at such a ridiculous rate as what we've just seen. I am not naïve enough to think that Apple doesn't have some issues; Samsung (OTC:SSNLF) and others are making better and better products every day. However, a company that has a proven track record of creating economic value as Apple does warrants a closer look. As a side note, my analysis doesn't account for the fact that most of Apple's assets are cash, which is inherently unproductive. If we just looked at economic assets of Apple, EVA would be in the stratosphere.
Say what you will about Apple's competitive pressures, consumer sentiment, fickle customers, etc.; a company that produces economic value at the pace Apple does can always find a place in my portfolio.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.