Daniel Agramonte

Air T vs. Apple? Not Even Close

Turley,
Many companies use 8-10% as an internal hurdle rate--I was generous in discounting at 5% for years 1-10, as this is typically a risk-free rate. As such, discounting at 9.5% in the first 10 years, still assuming 20% earnings growth gives an Intrinsic Value of about $80/share (about 50% below current prices).

After that, I guess it's fair to grow earnings at 5% (who knows, we might have a depression at that point?). I really struggle after year 15--in practical terms, where was AAPL 15 years ago, and where will they be 15 years from now? Who knows? Regardless, growing revenue at 5% during years 10-15 gives us a valuation of about $117/share. While fraught with execution risk, this may be achievable. I haven't screened it lately, but I suspect VERY FEW companies have had 20% earnings growth for 10 years. Think about it--with compounding, etc., it would only take one flat year to mess things up.

That's where it starts to get inplausible. How many companies can keep from having a bad year or two during a 10 year stretch? As I recall, AAPL was losing money in 1999. Their phenomenal growth in 2005, 2006 and 2007 enabled them to overcome the drag at the beginning of the decade. Bottom line: while the constant growth model is good from a theoretical standpoint, and my mathematical brain wants to add something to cover earnings in perpetuity, I struggle to comprehend what might be going on beyond year 10, let alone year 15. The changes in the technology alone due to Moore's Law would be enough to boggle the mind after year 10. Lots of food for thought and even more risk and uncertainty. In short, plenty of moving parts for a company that, despite a good four year run, hasn't yet proven its ability to grow consistently for a decade. In fact, I can only think of a handful of companies that have shown an ability to grow a large enterprise for a decade, and many of them are already held by Berkshire Hathaway: GE, P&G, American Express and perhaps a couple of oil companies.

Air T vs. Apple? Not Even Close

There's more analysis, this time more qualitative, on tap for Monday. Thanks for the comments and feedback. Your unique perspectives are appreciated.

Air T vs. Apple? Not Even Close

Turley
You are exactly right. Taking EPS growth at 20% annually out to 20 years gives about $590/share. I used 10 years for a very practical reason: I suspect Steve Jobs will be sipping Mai Tais in Miami in less than 20 years (Bill Gates is already bowing out and Andy Grove is long gone, but John Chambers is still going strong at 58). In other words, 20 years is a long time and Apple may not even exist as we know it today. It was certainly a mess before Jobs came back--who knows what'll happen after he leaves. Then again, maybe in 20 years Warren Buffett will still be around (at 97) and Berkshire Hathaway's A shares could be trading at $1 million? Thanks for the comment.

Air T vs. Apple? Not Even Close

Supplemental Disclosure: The author is long 6 iPods and 4 Macs

4 Microcaps Warren Buffett Would Love

Josh
Thanks for the feedback. As always with investment advice, caveat emptor (buyer beware). The approach here was designed to focus on companies showing strong value despite their modest size (since value investors typically restrict their focus to companies with more than $500 million in sales). There are many aspects of the company that you should look at and it goes without saying that microcap investors (as opposed to speculators) should perform a deep due diligence before deciding to own a specific comany. The guidelines here are simply starting points in the analysis and don't purport to be the definitive answer. Thanks again for your feedback.