Getting Apple's Cash Right And Why It's Important

| About: Apple Inc. (AAPL)

If cash is king, then there is no doubt that Apple (NASDAQ:AAPL) is The King. However, many of the articles I read on the company misstate the amount of cash that they hold. In many cases articles will state the amount of cash held by Apple as roughly $26 billion. That number is far from correct no matter how you slice it. Pure cash/cash equivalents were actually $9.8 billion at the end of the last quarter. But truth be told, Apple was virtually sitting on $81.6 billion in cash/investments. This information is readily available in their latest annual report - just scroll to page 55 for the details.

As you might imagine, when anyone accumulates a sufficient amount of cash to cover current ongoing expenses, the cash just starts to pile up. As this happens, most will find a way to invest it. It is, after all, the prudent thing to do. Apple is no different. They have essentially piled up $81.6 billion in cash. It is how it is invested, and thus classified on their balance sheet, that leads to the confusion among some that Apple has cash of only $26 billion.

First, from an accounting perspective, an asset is classified as current if it has a maturity of less than 1 year from the balance sheet date. An investment with a maturity of greater than 1 year is classified on a balance sheet as a long-term asset. As an example, if Apple invested $2.5 billion in an 18 month certificate of deposit (CD), that amount will be classified as long term if the maturity of the CD, as of the balance sheet date, is greater than 12 months out. As of Apple’s quarter ending in September, it had $9.8 billion in cash and/or investments readily convertible to cash. It also had invested $16.1 billion in securities that had a maturity date of less than 1 year (short-term marketable securities). These two numbers combined represent the $26 billion that is often quoted as the cash held by Apple because it shows up on the company’s balance sheet as cash and short term investments under current assets. What many fail to look at is the $55.6 billion that shows up as long-term investments under long-term assets on the balance sheet.

It certainly makes sense that with the pile of cash that Apple has it would diversify its risks. Part of this diversification undoubtedly includes investing in securities with differing maturity dates. The majority of Apple’s long-term investments are made up of maturities ranging from 1 – 5 years. Whether short term or long term, Apple invests in relatively safe securities made up of mutual funds, U.S. Treasury and agency securities, non-U.S. government securities, CD’s, commercial paper, corporate securities and municipal securities. All of these items together, pure cash, short-term and long-term marketable securities, added up to $81.6 billion as of Apple's last quarter ending in September 2011.

What’s even more staggering is that just in the one year period ending in 2011, Apple added $30.6 billion to its coffers. What did it do with most of this money? It invested nearly all of it in long-term investments. Apple’s long term marketable securities stood at $25.4 billion at the end of its September 2010 quarter compared to $55.6 billion one year later (most recent quarter ending in September 2011), for an increase of $30.2 billion. At the same time, its short term cash and marketable securities at September 2010 stood at $25.6 billion compared to the $26 billion at September 2011, or an increase of just $.4 billion. In another words, Apple has no further need for "short-term" cash so it is taking its current cash earnings and tucking it away in longer-term securities where it is likely getting a better rate of return. It's worth keeping an eye on Apple's short term cash/maretable securities position as an increase may be an indication that something large is in the works.

Apple’s $81.6 billion of cash amounts to roughly $88 per share. If Apple just meets its earnings estimates for the current year, it is likely to add another $38 billion to its cash hoard in 2012 (based on cash-flow in the prior year and assuming no major acquisitions), ending September 2012 with over $120 billion in cash, or roughly $128 per share. It is likely that Apple has already added $11 billion in cash for its quarter ending in December, which will bring its cash hoard to nearly $93 billion or roughly $100 per share (we will find out when they release their results on January 24th).

Personally, from an investment standpoint, I love companies with cash, the ability to generate cash and that virtually have little or no debt (Apple has no debt). Buying Apple stock at $420 today essentially gives me ownership rights to the $120 in cash that Apple will have earned by the end of September 2012. This leaves me with roughly a $300 investment based on future earnings. Assuming no growth in earnings at all and that Apple just continues to earn $40 per share per year, the return on my $300 investment is 13.3%. Not too shabby considering that the same $420 investment also gives me ownership rights to everything else owned by the company and the $40 is likely conservative. In turbulent times, these cash reserves act as a huge safety net for investors – putting a floor under the stock. Ultimately, Apple’s ability to generate huge amounts of cash, along with the cash it already holds, is one of the reasons Apple's stock will continue to go higher. It's good to be The King.

Disclosure: I am long AAPL.