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Apple’s (NASDAQ:AAPL) recent results are extraordinary. Few other companies, if any, have achieved the business performance that Apple has achieved over the past 10 years. It has grown EPS from $0.09 to $27.66 representing a compounded annual growth rate of 77%. Over the last 10 years it has created total net earnings of over $60B and total Free Cash Flow of over $76B. It currently has no debt and almost $10B in the bank.

The future of Apple, like any big tech company, depends on how well they continue to innovate. Growth will need to come from the continuous development of new products that consumers want to buy, as their existing products will only provide a certain amount of growth. Few people know the products that Apple is currently working on, and even fewer people know if they will be successful or not. These are the reasons why tech companies are next to impossible to forecast more than a year or 2 out, and why Warren Buffett typically doesn’t invest in them.

A lot has been written on Apple, including predictions on future performance. The purpose of this article is to determine if now looks to be a good time to buy Apple shares, from a Value point of view.

Quality Rating

AAPL QR
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Apple scores one of the highest Quality Ratings in our database. Over the last 10 years, the company has increased EPS each year, but not only that it has increased profitability as measured by Normalized Return on Equity as well.

Intrinsic Value

AAPL IV
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Based on the Margin of Safety calculation method of (Intrinsic Value – Share price) / Intrinsic Value, Apple scores a very reasonable 30% Margin of Safety.

AAPL IV Graph
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During the Global Financial Crisis, as with almost all companies, the share price of Apple dropped and since then the share price has been trying to catch up to Intrinsic Value. The graph illustrates that now looks to be a good time to invest from a Value point of view.

Capital Management

If Apple is unable to grow, and continues to earn around $26B in net earnings each year as it did in FY2011, how would the company look? If the company was unable to use their huge volumes of cash to further grow the business, they may look towards paying a dividend or buying back shares. This is a bit of a hypothetical exercise, as nobody expects Apple to start paying a dividend in the near future, at least not a significant one. But it’s important to consider various scenarios so as to understand downside risk. A point worth making here is that most tech stocks, Apple included, have considerable downside risk, as it is difficult to keep inventing new products that take the world by storm. The absolute worst case scenario for Apple is that something terrible happens and they are unable to achieve a profit of $26B into the future. But for this example, let’s consider that they are able to achieve the $26B, as a minimum, into the future.

  • Scenario 1: Payout Ratio of 50%: The Intrinsic Value would reduce to $475 (to understand why Intrinsic Value would decrease as a result of the introduction of a dividend, see this article. And the dividend yield based on the current share price of $376 would be 3.7%.
  • Scenario 2: Payout Ratio of 75%: The Intrinsic Value would reduce to $364, and the dividend yield based on a share-price of $376 would be 5.6%.

Similar value (3.7% and 5.6%) would be created if the money in the above 2 scenarios was used to buy back shares instead of paying dividends.

Conclusion

It is rare to find a company with such a wonderful 10 year performance as Apple trading at a meaningful discount to its Intrinsic Value. The future growth of Apple depends on their ability to invent new products that consumers will want to buy, and with the passing of Steve Jobs, stock market participants may be skeptical as to how well Apple can continue to innovate.

Investors who believe that Apple will continue to invent new successful products would see a wonderful investment opportunity at current prices.

Source: Apple - Is Now a Good Time to Invest?