Apple (AAPL) is a solid company displaying continuous high growth. Even though the stock has hit $700, the fundamentals are strong and there is still a potential 40% upside remaining.
Expectations of Apple
Congratulations to AAPL longs. The price is now above $700 with a market cap of $658B. AAPL has once again left the market in the dust by achieving a gain of 73% YTD.
Now that AAPL has reached the $700 milestone, I want to take a fundamental look at what is baked into the $700 stock price and then use that information to see what the potential future stock price could be.
But first, exactly what does Mr Market believe AAPL will do?
To start, here's a dashboard overview from the OSV Stock Valuation Spreadsheet for you to look.
Download this 10 page OSV stock valuation report of AAPL.
Looking at the overview, some highlights include:
- 5yr FCF growth is 60% which is still very close to the 10yr FCF growth of 63.8%. AAPL has barely slowed down.
- CROIC of 250%!
- FCF/Sales of 23% states that AAPL converts 23c of sales into FCF. Pure cash machine.
- ROE and ROA has been increasing and at highest levels
10 Years of Fundamental Numbers
I make use of 10 years of financial numbers to check on a company and what AAPL has achieved is stunning.
Even the relative numbers shows that with current prices, the valuation has actually come down.
Here are some TTM metrics to start you off:
- PE of 16.5
- Cash adjusted PE of 15.8
- EV/EBITDA of 11.8
- EV/FCF of 15.8
Moving onto the returns the company has been able to achieve
- ROE of 36%
- ROA of 25%
- ROIC of 30.5%
- CROIC of 32%
This screenshot gives a better indication of how AAPL has performed and the fact that the relative valuation is actually getting cheaper despite the growing returns.
What Is Mr Market Currently Expecting from AAPL?
The OSV stock valuation spreadsheets offer many tools available to calculate the value of a stock but I want to focus on reverse engineering the current stock price to see how much growth is expected.
Using the reverse DCF method is a much simpler way to determine the valuation of a company because instead of relying on growth estimates to predict the future, you can figure out what the expected growth rate is and then decide whether it is lowballing the company or not.
with a discount rate of 9% the expected growth in the current share price of $701 is 12.6%.
But take a look at the multiyear performances and 12.6% looks to be a very conservative number. The last 5 years of performance is significantly greater than the last 10 year multiyear performances.
The No Growth Condition
To get the lowest valuation range possible, let's consider a no growth model.
The best technique is to use the earnings power value model.
I've gone ahead and made some calculations to adjust the income to include AAPL's earnings power and moat as well an estimated maintenance capital expenditure.
The EPV model shows that even in a no growth scenario, AAPL has an earnings power value of $435 which far exceeds its reproduction value of $113.
For those not familiar with EPV, what does this mean?
It shows that AAPL has awesome earnings power and a huge moat. It has been creating shareholder value and is able to use its assets in a spectacular way to produce income.
Forward Looking DCF
Seeing as how the current stock price is underpricing AAPL's potential, I want to see what the DCF model is going to show as a possible intrinsic value.
We saw that 12.6% was the expected growth, but analysts are predicting AAPL to grow at 19% in the next year.
If this is the case, the OSV DCF model shows that AAPL is worth over $1000.
Adjusted PE Valuation
Another way to value AAPL would be to look at the quality of its business, financial status and earnings predictability.
This valuation model is based off Vitaliy Katsenelson's book Active Value Investing and works by adding or subtract points to the current PE based on the three factors mentioned above.
AAPL scores a 19/20 in the business section, 20/20 in the financial health section and 19/20 for earnings predictability.
Then using the model to add these points up, AAPL's fair value PE comes out to 23.5 compared to the current 16.5.
This adjusted PE of 23.5 equates to a fair value of $1,000 for AAPL's stock as shown below.
With a lower valuation range at $1,000 this means that there is 40% upside.
As a value investor the current price is subconsiouly too high for me to buy a position. I'll have to break this mental bias first. I don't hold AAPL and I was wrong to think that it would slow down.
AAPL has been taking advantage of anything it can and the fundamentals show the strength of the company in all respects.
Although I will not buy any shares, I certainly would not bet against the company at this stage.