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David Trainer posted a second Seeking Alpha article titled "The Truth Behind Apple's Numbers" which was a follow-up to an article with a $240 target price for Apple (NASDAQ:AAPL). While I do subscribe to the notion that markets revert to a mean and that competition does affect companies, Trainer still doesn't provide any analysis beyond stating that Apple's ROIC or Return on Invested Capital must come down since it is higher than other companies. And while I would agree that the market cares about NOPAT (Net Operating Profit After Tax) or essentially net income, there are no estimates to get to the NOPAT numbers that he is projecting. I wrote an article questioning the use of a single data point, in this case Return on Invested Capital, to determine a price target.

Below is what I calculate his numbers estimate Apple's EPS to be with an $8 billion NOPAT estimate adjusted for the company's excess cash of $118 billion. The result is that the earnings multiple would be 13.6x with an EPS of $8.47. While his excess cash of $118 billion is lower than the $144.7 billion Apple has, since so much is overseas it makes sense to not utilize all of it in the valuation calculations.

Price

$240

Shares (mil.)

945

Market Cap ($ bil.)

$227

Excess Cash ($ bil.)

$118

Enterprise Value

$109

NOPAT ($ bil)

$8

Multiple

13.6

EPS

$8.47

In Trainer's analysis NOPAT is $8 billion or a NOPAT margin of 5.1% along with the excess cash of $118 billion. Note that the last time NOPAT's margin was this low was fiscal 2004 when it was 2.4%.

Since Trainer hasn't provided any fundamental analysis and numbers, I've run some unit, ASP and margin projections. The goal is to determine what it would take for Apple's net income to decline to a result that would essentially translate to his NOPAT estimate of $8 billion. Note that the $8 billion compares to fiscal 2013 and 2014 Street analyst net income estimates of approximately $37.4 billion and $40 billion, respectively.

However, to check that my assumption for net income is essentially equal to NOPAT, let's compare fiscal 2011 results. Apple's fiscal 2011 net income was $25.9 billion or 23.9%. Trainer has NOPAT in fiscal 2011 of $25.3 billion or a NOPAT margin of 23.3%. They are close enough for this analysis.

Potential revenue scenarios

There are endless scenarios that one could assume. I've calculated two with unit and ASP assumptions that would be needed to generate $124 and $92.5 billion in yearly revenue compared to $156.5 billion in fiscal 2012.

The following table is just two scenarios to generate lower revenue and get to around $8.50 in EPS (see following table). The first iPhone scenario assumes the company announces a lower priced iPhone which drives higher units along with flatish iPad shipments but at lower price points. The second scenario has lower iPhone and iPad shipments with lower ASPs than fiscal 2012. Macs and iPods have lower unit shipments in both scenarios.

Scenario #1

Scenario #2

Fiscal 2012

Lower Rev

Lowest Rev

iPhone units

125,046

140,000

100,000

iPhone ASP

$644

$400

$450

iPhone revenue

$80,477

$56,000

$45,000

iPad units

58,310

60,000

50,000

iPad ASP

$556

$400

$350

iPad revenue

$32,424

$24,000

$17,500

Mac units

18,158

16,000

12,000

Mac ASP

$1,279

$1,300

$1,100

Mac revenue

$23,221

$20,800

$13,200

iPod units

35,165

20,000

12,000

iPod ASP

$160

$165

$150

iPod revenue

$5,615

$3,300

$1,800

Other revenue

$14,771

$20,000

$15,000

Total revenue

$156,508

$124,100

$92,500

I have developed three scenarios to get to about $8.50 in EPS. The first scenario takes fiscal 2012 revenue and lowers the gross margin to get to $8.66 in EPS (along with other income increasing to $1 billion since Apple has already reported $809 million in other income in the first half of fiscal 2013). Gross margin would have to decline to 15% to drive EPS so low.

The second scenario takes the $124 billion from revenue scenario #1, tweaks the operating expense lines and determines that Apple would need 18% gross margins to hit $8.53 in EPS.

The third scenario takes the $92.5 billion from revenue scenario #2, again lowers operating expenses and determines that Apple would need 23% gross margins to generate $8.75 in EPS.

Scenario #1

Scenario #2

Scenario #3

Fiscal 2012

Change GM

Lower Rev

Lowest Rev

Revenue

$156,508

$156,508

$124,100

$92,500

Cost of revenue

$87,846

$133,032

$101,762

$71,225

Gross Profit

$68,662

$23,476

$22,338

$21,275

Gross margin

43.9%

15.0%

18.0%

23.0%

R&D

$3,381

$3,381

$3,723

$3,700

Sales & Marketing

10,040

10,040

8,687

7,400

Total Oper. Expenses

$13,421

$13,421

$12,410

$11,100

Operating income

$55,241

$10,055

$9,928

$10,175

Operating margin

35.3%

6.4%

8.0%

11.0%

Interest income

$522

$1,000

$1,000

$1,000

Pre-tax income

$55,763

$11,055

$10,928

$11,175

Pre-tax margin

35.6%

7.1%

8.8%

12.1%

Income taxes

$14,030

$2,874

$2,841

$2,906

Tax rate

25%

26%

26%

26%

Operating income

$41,733

$8,181

$8,087

$8,270

EPS

$44.14

$8.66

$8.56

$8.75

Shares

945

945

945

945

Conclusion

For Apple to only earn around $8 billion in net income, it would have to take a dramatic decline in revenue and gross margin. I estimate that the company will earn $39.34 in EPS ($37 billion net income) in fiscal 2013 and $45.43 ($41 billion) in fiscal 2014. While these won't be exactly what Apple reports, I believe the results will be much closer to this than $8.50.

Apple's shares could trade lower and maybe even test their recent low of $385. However, with the shares trading at about 11x my fiscal 2013 EPS estimate, which does not take into account any of the excess cash, it seems like the likelihood of them getting to $240 requires too many things to go wrong.

Source: What Would It Take In Units And Margins To Have Apple Trade At $240