ModernGraham Quarterly Valuation Of Apple

Mar.12.14 | About: Apple Inc. (AAPL)

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Apple Inc. fares in the ModernGraham valuation model.

AAPL Chart

AAPL data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $530.92
MG Value $1,457.64
MG Opinion Undervalued
Value Based on 3% Growth $548.98
Value Based on 0% Growth $321.82
Market Implied Growth Rate 2.76%
Net Current Asset Value (NCAV) -$16.98
PEmg 14.02
Current Ratio 1.49
PB Ratio 3.65
Click to enlarge

Balance Sheet - 12/28/2013

Current Assets $80,347,000,000
Current Liabilities $53,769,000,000
Total Debt $16,961,000,000
Total Assets $225,184,000,000
Intangible Assets $6,127,000,000
Total Liabilities $95,500,000,000
Outstanding Shares 892,550,000
Click to enlarge

Earnings Per Share

2014 (estimate) $41.19
2013 $39.75
2012 $44.15
2011 $27.68
2010 $15.15
2009 $9.08
2008 $5.36
2007 $3.93
2006 $2.27
2005 $1.56
2004 $0.36
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Earnings Per Share - ModernGraham

2014 (estimate) $37.86
2013 $33.18
2012 $26.70
2011 $16.06
2010 $9.22
2009 $5.65
Click to enlarge

Dividend History

AAPL Dividend Chart

AAPL Dividend data by YCharts


Apple Inc. is an excellent company for Enterprising Investors, having failed only the investor type's current ratio requirement. The company does not qualify for the Defensive Investor due to its low current ratio, lack of a long enough dividend record, and high PB ratio. As a result, Enterprising Investors should feel very comfortable proceeding with further research into the company and its competitors, including a review of ModernGraham's valuation of Microsoft (NASDAQ:MSFT) and ModernGraham's valuation of Google (NASDAQ:GOOG).

As for a valuation, the company appears to be significantly undervalued. Apple has grown its EPSmg (normalized earnings) from $9.22 to an estimated $37.86 for 2014, a growth rate that far outpaces the market's implied estimate of only 2.76% earnings growth. The ModernGraham valuation model has accordingly returned an estimate of intrinsic value that is much higher than the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Apple Inc.? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author held a long position in Apple Inc. (NASDAQ:AAPL) but did not hold a position in any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.