Apple (AAPL) has been a favorite company among technophiles in recent years because of its innovation and exciting new products. Tech traders, similarly, love to watch Apple’s stock for the economic benefits those products can bring, none of which are readily predictable except in the very near term. With Apple’s stock now flirting with the highs it set last summer, it ought to be worthwhile to take a look at this company. But what I would like to do, in this inaugural “Can-It-Be-Done” blog posting, is to take a look at Apple from the RBP (Required Business Performance) Investing perspective, rather than that with which most readers are likely familiar.
The RBP Investing approach to stock analysis is different from the customary approach used on Wall Street. For instance, last week an analyst upgraded Apple Inc. to “Outperform” and set a price target of $235. This implies that at its current price of around $187, Apple is a buy. The analyst went on to explain that this price was determined by multiplying his own earnings estimates by the middle of the multiple range in which the company has traded in recent years.
Nearly every analyst I am aware of publishing regular reports on specific stocks will describe his conclusion in this way. And oftentimes the price target is nothing more than the product of a subjectively chosen earnings multiple and earnings estimates the analyst calculates from various operational considerations.
There is nothing particularly wrong with this approach, I just think there is a better way. For one thing, a detailed discounted cash flow [DCF] analysis is often neglected in analyst reports. Since DCF is the only legitimate way to value a stock, an assertion I argued here, any report failing to integrate it is dubious, in my opinion. More importantly, though, the standard analyst report is simply too opaque. That is, we don’t really know why $235 is an appropriate price, other than the fact that it is the analyst’s dictum. The RBP Investing approach, however, makes all such prices completely transparent.
Were this analyst to use the RBP Investing approach, instead of setting a price target and suggesting a trading decision, he might say:
But this probability alone does not tell us exactly what management’s performance need be. So the analyst might go on to discuss Apple’s Required Business Performance [RBP].Apple’s RBP Probability is currently 81%. This implies there is an 81% chance that, in the coming quarter, management will produce the results the stock market is collectively expecting. Should management do so, we can expect a positive price reaction. Among companies in the Technology Hardware and Equipment Sector, Apple ranks relatively high, as the average company in this sector has an RBP Probability of 63%.
At Apple’s current price of $185, the stock market collectively is expecting the company to sell approximately 56.5 million iPods in the coming twelve months, 9 million iPhones, 6.5 million portable computers and 3.7 million desktops.
This is a far more transparent way for the individual to assess a stock and overcomes the two most troublesome assumptions he must make when taking an analyst’s advice. These are a) that the operational analysis is robust enough to make the analyst’s earnings estimates accurate and b) that the earnings multiple chosen is appropriate.
Instead of taking for granted that a certain individual has made the right predictions, we use the information we already know for certain – the stock price – to help us make the decision ourselves. We know exactly what an RBP Probability of 81% means, because we know what the RBP behind it is. We don’t try to speculate about where the stock is going. Rather, we try to assess the risk that the stock will go down.
So the question has become, can it be done? Can Apple indeed sell 56.7 million iPods, 9 million iPhones, 6.6 million portable computers and 3.7 million desktops in the next twelve months? All the RBP numbers I mention above are current as of May 30, 2008, but not being an expert in this stock or this sector, I hesitate to answer the question myself. And so I will leave that to the readership of this blog. What do you think?
