Apple: Free Cash And The Wearables Market To Drive Shareholder Value

Jun.20.14 | About: Apple Inc. (AAPL)


From a fundamental point of view, how does Apple look?

Will the iWatch be a success?

At this point in the market, is Apple a buy, sell or hold?

Over the past couple of years Apple's (NASDAQ:AAPL) stock been on a roller coaster. Since reaching its all time high of just over $100.00 (adjusted for the recent 7 to 1 stock split) in September of 2012, the stock price sold off rather sharply in 2013, hitting lows around the $60.00 level. Since April 2013, Apple's shares have begun a rebound and are now back around $93.00. So what's next? Are we on our way back to $100+ or back to the $60 level?

Based on a fundamental assessment and some valuations, I will look to assess the relationship between these ratios and the stock price. Upon further assessment, I will look at Apple's current valuation and estimate where the stock is headed next.

AAPL Chart

AAPL data by YCharts

As Apple designs Macs, personal computers, along with OS X, iLife, iWork and professional software, the company is on the leading edge of technological advancements designed for corporate and personal use. Apple leads the digital music revolution with its iPods and iTunes online store, and the company has reinvented the mobile phone through its iPhone and App Store, as well as is defining the future of mobile media and computing devices though the iPad.

In the section below, I will analyze some aspects of Apple's past performance. From this evaluation, we will be able to see how Apple has fared over the past four years regarding its profitability, debt and capital, and operating efficiency. Based on this information, we will look for strengths and weaknesses within the company's fundamentals, which should give us an understanding of how the company has fared over the past four years and will give us an idea of what to expect in the future.

Definitions sourced from Investopedia.


Profitability is a class of financial metrics used to assess a business's ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2011 = $25.922 billion.
  • Net income 2012 = $41.733 billion.
  • Net income 2013 = $37.037 billion.
  • Net income 2014 TTM = $37.707 billion.

Over the last three and a half years, Apple's net profits have increased from $25.922 billion in 2011 to $37.707 billion in 2014 TTM. This indicates a substantial increase of 45.46%.

AAPL Chart

AAPL data by YCharts

As the chart above indicates, from a percentage point of view, there is a strong relation between the company's net income and the stock price. Despite concerns in 2013, Apple's profits were still very strong, thus warranting the current recovery.

  • Operating income 2011 = $33.790 billion.
  • Operating income 2012 = $55.241 billion.
  • Operating income 2013 = $48.999 billion.
  • Operating income 2014 TTM = $50.287 billion.

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three and a half years, Apple's operating income has also increased substantially. The operating income has increased from $33.790 billion in 2011 to $50.287 billion 2014 TTM, revealing a 48.82% increase.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net income 2011 = $25.922 billion.
    • Net income 2012 = $41.733 billion.
    • Net income 2013 = $37.037 billion.
    • Net income 2014 TTM = $37.707 billion.
  • Total asset growth

    • Total assets 2011 = $116.371 billion.
    • Total assets 2012 = $176.064 billion.
    • Total assets 2013 = $207.000 billion.
    • Total assets 2014 TTM = $205.989 billion.
  • ROA - Return on assets

    • Return on assets 2011 = 22.28%.
    • Return on assets 2012 = 23.70%.
    • Return on assets 2013 = 17.89%.
    • Return on assets 2014 TTM = 18.31%.

Over the past three and a half years, Apple's ROA has decreased from peak in 2012 of 23.70% to its current ROA of 18.31%. This indicates that the company is making less on its assets than it did in 2011.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2011 = $116.371 billion.
    • Total assets 2012 = $176.064 billion.
    • Total assets 2013 = $207.000 billion.
    • Total assets 2014 TTM = $205.989 billion.
    • Equals an increase of $89.618 billion.
  • Total liabilities

    • Total liabilities 2011 = $39.756 billion.
    • Total liabilities 2012 = $57.854 billion.
    • Total liabilities 2013 = $83.451 billion.
    • Total liabilities 2014 TTM = $85.810 billion.
    • Equals an increase of $46.054 billion.

AAPL Total Assets (Quarterly) Chart

AAPL Total Assets (Quarterly) data by YCharts

Over the past three and a half years, the company's total assets have increased by $89.618 billion, while the total liabilities have increased by $46.054 billion. This shows that the company's assets have increased more than the liabilities thus adding shareholder value.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2011 = $44.988 billion.
    • Current assets 2012 = $57.653 billion.
    • Current assets 2013 = $73.286 billion.
    • Current assets 2014 TTM = $70.541 billion.
  • Current liabilities

    • Current liabilities 2011 = $27.970 billion.
    • Current liabilities 2012 = $38.542 billion
    • Current liabilities 2013 = $43.658 billion.
    • Current liabilities 2014 TTM = $43.208 billion.
  • Current ratio 2011 = 1.61
  • Current ratio 2012 = 1.50
  • Current ratio 2013 = 1.68
  • Current ratio 2014 TTM = 1.63

Over the past three and a half years, Apple's current ratio has remained relatively the same. As the ratio is above 1, this indicates that Apple would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2011 shares outstanding = 6.557 billion.
  • 2012 shares outstanding = 6.617 billion.
  • 2013 shares outstanding = 6.522 billion.
  • 2014 TTM shares outstanding = 6.157 billion.

AAPL Shares Outstanding Chart

AAPL Shares Outstanding data by YCharts

Over the past three and a half years, the number of company shares has decreased significantly. The amount of common shares has decreased from 6.557 billion in 2011 to the current amount of 6.157 billion. (Please note the numbers have been adjusted for the recent 7 to 1 stock split)

In April 2013, Apple's Board of Directors increased the share repurchase program. The board authorized an increase from $10 billion to $60 billion, of which $45.9 billion had been utilized as of March 29, 2014.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2011 = $43.818 billion / $108.249 billion = 40.48%.
  • Gross margin 2012 = $68.662 billion / $156.508 billion = 43.87%.
  • Gross margin 2013 = $64.304 billion / $170.910 billion = 37.62%.
  • Gross margin 2014 TTM = $66.688 billion / $176.035 billion = 37.88%.

Over the past three and a half years, Apple's gross margin has remained in the 37.88% range. According to Apple's Q2 results report, the company is expecting the gross margins to remain in the 37% to 38% range.

AAPL Gross Profit Margin (<a href=

AAPL Gross Profit Margin (TTM) data by YCharts

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2011 = $108.249 billion.
    • Revenue 2012 = $156.508 billion.
    • Revenue 2013 = $170.910 billion.
    • Revenue 2014 TTM = $176.035 billion.
    • Equals an increase of 62.62%.
  • Total Asset growth

    • Total assets 2011 = $116.371 billion.
    • Total assets 2012 = $176.064 billion.
    • Total assets 2013 = $207.000 billion
    • Total assets 2014 TTM = $205.989 billion.
    • Equals an increase of 77.01%.

Over the past three and a half years, Apple's revenues have had a strong run. They have increased by 62.62%. This is outstanding, but when compared to the assets, this does imply some weakness. Over the same amount of time, the assets have increased by 77.01%. This indicates that Apple is becoming less efficient at creating revenues based from their assets.

Cash Flow

Free Cash Flow = Operating Cash Flow - Capital Expenditure

Over the past three and a half years, Apple has been able to sustain increasing free cash in every year. In a business that is looking to spend a lot of cash in R&D to support business growth and increasing its dividend to keep shareholders happy, this indicates that Apple can support these costs without adding additional risk to the company and ultimately, the shareholder.

  • 2011 - $37.529 billion - $7.452 billion = $30.077 billion
  • 2012 - $50.856 billion - $9.402 billion = $41.454 billion
  • 2013 - $53.666 billion - $9.076 billion = $44.590 billion
  • 2014 TTM - $53.944 billion - $7.852 billion = $46.092 billion

AAPL Free Cash Flow Chart

AAPL Free Cash Flow (TTM) data by YCharts

Based on the information above, the analysis is revealing a "mixed bag" of results. Growth as far as revenue, net income, operating income as well as free cash is substantial. Having stated that, the analysis is showing some weakness regarding the company's efficiency. The company's assets are outpacing the revenue as well, the ROA and gross margins have slipped significantly over the past few years.

With a new product cycle underway, how will the stock perform moving forward?

Earlier in June, Apple stated it was going to release its much anticipated iWatch sometime in October. Apple is expecting to produce 3 million to 5 million iWatches a month, and has timed the release date exceptionally for maximum sales over the holiday season. With growing concerns over health issues in North America and the "developed world," Apple is "hitting the nail on the head," as it expects sales to be very robust.

The purpose of the iWatch is to help an individual track their health. The iWatch coincides with the fitness information gathering app "Healthbook" that the company recently displayed at WWDC.

Healthbook is an app designed to coincide with the new operating system iOS 8. The purpose of the App is to collect and organize a user's information regarding health and fitness. The App is designed to give feedback on issues like blood pressure, hydration, heart rate and glucose levels.


At this point, analysts are bullish on the company. Based on a significant surge from the wearables market, analysts from the Nasdaq are expecting ~12.8% growth yoy for the next five years.

As Apple products rarely go on sale and are often priced at a premium, in the section below, I will use the DCF valuation to estimate what fair value currently is.


In the section below, I will use a couple of different methods to find a valuation of the stock price. In this section, I will use the Discounted Cash Flow valuation model to estimate the current value and target price for each share.

I believe using the Discounted Cash Flow valuation model for Apple to be fair, because DCF analysis can help one see where the company's value is coming from and can generate an opinion based on that.

FY 2012 FY 2013 FY 2014 TTM
Operating Income 33,790 55,241 49,252
Taxes 8,283 14,030 13,161
Unlevered Net income 25,507 41,211 36,091
D&A 1,814 3,277 7,313
EBITDA 35,604 58,518 56,565
Free Cash Flow 30,077 41,454 44,245
WACC 6.01%
Terminal Value 8.61X EBITDA 487,025
Total Cash Flow 30,077 41,454 602,801
Net Present Value $571,238.64
Total Debt 16,960
Cash and Cash Equivalents 14,259
Net Debt $2,701.00
Equity Value $568,537.64
Shares Outstanding 6030
Current Value $94.28
Click to enlarge

Even though there are variations in calculating this formula, this model is based on a terminal value of $487.025 billion and a WACC of 6.01%. The terminal value of $487.025 billion is based on the company trading at an industry average of 8.61x EBITDA. Using this valuation, I have concluded Apple's value to be ~$94.28 per share.

Cash is King

As the chart below indicates, over the long term there is a strong correlation between Apple's free cash and Apple's stock price. At the end of the day, "cash is king" and Apple has plenty of that.

AAPL Chart

AAPL data by YCharts

Earnings and Dividends

With an excess of $46 billion in free cash, this gives management the ability to continue to grow the dividend, buy back shares and continue to develop and market Apple's products.

AAPL Dividend Chart

AAPL Dividend data by YCharts

As indicated with the chart above, in July 2012 Apple began paying a dividend for the first time since October 1995. The current yield is ~2.04%.

At this point, I believe the dividend will become an increasingly important factor for the shareholder moving forward. With the idea of keeping some cash flowing into shareholders' pockets, the $46 billion in free cash will go a long way toward weathering any storms that may lie ahead.


Apple is providing the following guidance for its fiscal 2014 third quarter:

  • revenue between $36 billion and $38 billion
  • gross margin between 37 percent and 38 percent
  • operating expenses between $4.4 billion and $4.5 billion
  • other income/(expense) of $200 million
  • tax rate of 26.1 percent

Looking forward

As I believe valuations are getting high, I would not be surprised if there was a 5%-10% correction over the next few months. If such a correction were to occur, this could present an excellent opportunity to add positions in Apple. As the chart above indicates, when there has been a correction, Apple's stock price gravitates back to where its free cash flow numbers are. As the free cash currently looks strong, I believe adding Apple's shares on a correction would offer an excellent opportunity.

Currently, I believe there is further upside to equity markets as major world economies are either recovering or are on the verge of recovering. As interest rates continue to remain near zero, this should favor equities.


Based on the analysis above, Apple's fundamentals are displaying a "mixed bag" of results. Having stated that, one aspect of the company that continues to increase is Apple's free cash.

As Apple currently has over $46 billion in free cash, this gives the investor the confidence that Apple has the ability to grow its dividend, buy back shares, and ultimately increase shareholder value.

2014 should prove to be an interesting year for Apple. The company has already introduced the release dates for the iWatch, thus penetrating the wearables market. With the recent release of iOS 8 SDK, combined with sales of more than $800 million, this has created huge opportunities for developers, which in turn is expected to increase sales and earnings. At this point, analysts are bullish on the company with estimates in the 12.8% growth yoy.

Long term, if you bought the stock at this price, I believe you would be handsomely rewarded. However, I also believe the next few months could offer some volatility, and in my opinion, if you can buy the stock closer to the $70-$75 range, this would represent an excellent buying opportunity, as I believe the stock will again hit $100.00

Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.