Seeking Alpha

Jason Merriam

 
View Jason Merriam's Comments BY TICKER:
  • Apple Inc.: Bond Market Insights For Long-Term Dividend Risk [View article]
    Donald,

    Very interesting overview, thanks.
    Apr 24 11:55 PM | Likes Like |Link to Comment
  • Apple's Dividend Will Hit $20 Within 5 Years [View article]
    Given the depth of AAPL's pockets, why don't they just take themselves private?
    Mar 28 11:37 PM | Likes Like |Link to Comment
  • Apple's Cash Position Is Overstated By $70 Billion [View article]
    357694,
    Excluding the decline from Sept. highs, your "market" point is well taken. However, a Liverpool bar fight almost seems like a walk in the park when compared to a pummeling from AAPL loyalists.
    Oct 10 02:16 PM | Likes Like |Link to Comment
  • Apple's Cash Position Is Overstated By $70 Billion [View article]
    Alpha,

    The AAPL fanbase (in particular) is a rough crowd to work for anybody with a different take.
    Oct 10 01:13 PM | 2 Likes Like |Link to Comment
  • Apple's Cash Position Is Overstated By $70 Billion [View article]
    Wim,
    Very well thought article and presentation. The cash hoard has been a worrisome issue for some and you articulate the concerns succinctly.
    Oct 10 12:18 PM | 3 Likes Like |Link to Comment
  • Apple's Cash Position Is Overstated By $70 Billion [View article]
    Camden,

    It might be a typo, but "commas" are used as "periods" in many foreign financial numerical descriptors. Likely represents $500.70
    Oct 10 12:08 PM | 3 Likes Like |Link to Comment
  • Apple Pullback: Stock Price, Financial Statements Get Together, Finally [View article]
    Hewitt,
    Thanks for the kind words and I'm pleased that you appreciate the dual-cash potential. It's unconventional and I recall Mr. Fotta was met with lots of detractors despite the numerous successes the DCF model produced.

    Sort of the Rodney Dangerfield of fundamental analysis. Mis-understood and no respect.

    That said, dual cash analysis by itself won't pick winners 100% of the time. Yet, over the years it has provided a solid foundation to analyze earnings quality and cash-flow.

    Incorporating accruals and cap productivity into our screen has only enhanced our chances of profitability.

    These powerful analytics don't provide all the answers, but as a primary screen, it does a fine job in separating the wheat from the chaff, and with surprising accuracy.

    Similarly, AAPL may not be the best case study of DCF effectiveness (AAPL is in a world of its own), but that won't stop us from spreading the word.

    Regards,
    JM
    Jun 5 08:57 PM | 1 Like Like |Link to Comment
  • Apple Pullback: Stock Price, Financial Statements Get Together, Finally [View article]
    Sid,
    Glad to hear you got a laugh, but nobody is crying at this end. If you belief this is puffed up arrogance, then qualifying the only value in this article as "contrarian", makes you the bigger moron for wasting your time reading it and commenting.
    Jun 5 06:09 PM | 1 Like Like |Link to Comment
  • Apple Pullback: Stock Price, Financial Statements Get Together, Finally [View article]
    dgres100,
    Thanks for your comments. While I appreciate that you may have a different view of valuation, the dual cash-flow concept is difficult for some to get their arms around.

    Every company has funds generated by paying customers and "cash" created by balance sheet maneuvering. Discount cash flow models attempt to predict future value by "adjusting" present value.

    What we're doing is attempting to determine whether the "enterprise value" is justified. We know Apple products are flying off the shelf. That's not the issue.

    But, between current levels and some of the more lofty forecasts we see floating around, the discounting "forecast" so to speak will be more at risk to input errors (i.e. assumptions).

    Apple is not the typical stock obviously, which likely accounts for much of the disagreement to our analysis.

    Yet, the only difference really is that we are looking for potential strengths / weaknesses at this point which might possibly help or hurt a company's future potential.

    For starters, much of the higher forecasts we see are going to require longevity to future growth rates. Perhaps they will keep growing parabolic, but we just want to make sure the grandstand is sturdy enough to hold all the fans, so to speak.

    In the case of Apple stock, we are simply pointing out that (and since the amended subscription accounting) shares are priced more realistically to what is being portrayed in the financials.

    I'll do an Amazon analysis in the near future, so stay tuned. JM
    Jun 5 05:49 PM | 1 Like Like |Link to Comment
  • Apple Pullback: Stock Price, Financial Statements Get Together, Finally [View article]
    Hewitt,
    Thank you for the comments. On our website merriamreport.com, on the "Advantage" page, the left hand column does clearly credit both Ernst and Fotta as developers of the Dual-Cash model.

    While developing our adaptation, Mr. Fotta provided me feedback and suggestions for the model and objectives we were pursuing.

    We have no way to ascertain the actual formulas used in the Ernst/Fotta model, but the screen we have developed incorporates our interpretation of their techniques.

    We have tweaked our model over the years to include accrual and capital productivity tools which in combination, have proven to be very effective in our stock selection process.

    As you mention, free cash flow is often more intuitive and our DCF screen is our first step to determine the health and quality of both cash-flow and earnings.

    As for the first paragraph of your comment, I believe "fostered development" is being taken out of context as it was a reference to the Merriam report model. We have modified the profile to clarify this point.

    I too was saddened by Harry's death and although I never had the privilege of meeting him personally, his work at Tufts and contributions to economics made him a trailblazer.
    JM
    Jun 5 05:23 PM | 1 Like Like |Link to Comment
  • Apple Pullback: Stock Price, Financial Statements Get Together, Finally [View article]
    Thanks for comments:
    Our fair-value estimated is derived from an examination of the relationships between the financial statements over eight quarterly periods. It is intended to be reflective of the analysis used in our model. Consider it a different perspective to DCF and other more traditional cash-flow methodologies. There is a link to our report in the article.

    Guidance: AAPL management has historically been conservative with their guidance. Our analysis did not question growth and in fact we emphasized their brilliant execution and marketing.

    Future growth: there is no doubt that the company will continue to exploit opportunity; they've done a great job so far.

    Valuation: The point of our story was to express a view that at this point in time the story being told in the financials is better aligned to the price of the stock. It also takes into consideration non-cash components of the earnings and the contributions of income producing assets.

    To PedroG who has the marvelous benefit of a low cost basis, you have been handsomely rewarded for putting your money where your mouth is.

    However, anybody holding the stock following our Feb. 10th story would be down 5.5% as compared to about flat for the S&P 500.

    Intent of this story was to share an opinion that the stock was looking more approachable from where we sit. As to where it goes from here we have no idea.
    May 27 06:08 PM | 1 Like Like |Link to Comment
  • Apple's Cash Causing My Emerging 'Acquisition Anxiety' [View article]
    Given AAPL management's penchant for secrecy, they ought to start buying back their own shares and take themselves private.

    Why screw around with pesky shareholders when you got $323 billion market cap? They don't need no stinkin' shareholders!

    The aforementioned overseas funds (which as pointed out face steep tax consequences if repatriated), and the prepaid expenses, capex, etc. are essentially their insurance for supply chain and future capacity.

    That still leaves them $28 billion...a good start.

    Apple is basically a license to print money, and since these guys are so good at making it, as long as they keep cranking out stuff they think you need (this is after all their specialty) and maintain anything close to a 22% profit margin, they could have it all to themselves in a couple of years, with or without Steve Jobs.

    Better yet, take Cupertino private too, secede from California and become the 51st state of the union and the only west coast state other than Alaska to not have a budget deficit. Apple utopia.
    May 5 03:27 AM | 4 Likes Like |Link to Comment
  • Apple's Financials: Polished Exterior but Check the Oil [View article]
    Jonathon,
    I appreciate your willingness to revisit the issues and thanks for the constructive comments. You also raise some very good points as to the contrasts.

    i) I´m with you on the most valuable R&D ever undertaken, but veteran tech analyst Micheal Murphy points out in an excellent treatise from the early nineties called ¨Understanding Growth Flow Profits¨, R&D is the primary driver of future profits for any tech company. That said, competition alone, will find it necessary (Apple isn´t God yet) to at minimum, keep the R&D fire stoked. I won´t argue that they have to grow proportionally to sales, but at least more robustly compared to volume.

    ii) The MR examines OCF differently than most conventional methods and hence much of the reason detractors get all worked up over the dual-cash technique in the first place. That said, there are two links on our website merriamreport.com (click the “Product Info” tab and look at bottom of Learning Center bar) to two articles; one on dual-cash flow and the other on accruals. This will give a good primer and if you have additional questions contact me though the site or send me a message from the contact link in my SA profile.

    iii) COGS are relative to margins but as a revenue metric, help give us clues as to what happens to net income after this expense. That´s not to say we pan the importance of margins, they are. You will note that prior year capitalized R&D expenses were placed back into R&D, but if somehow reflective of a component of deferred revenue (we will never know), do not belong here or necessarily in Q1´s results. In this scenario, it does not have much import of what the component margin differential might be. It is however, part of the product mix. For example, a cheaper iphone will force every analyst to tweak their models.

    iv) We look at EV as a sort of theoretical value of takeover price, which in the case of AAPL, is also theoretically remote. I agree that the cash distorts the EV significance, but then again, there´s no debt. Using FCF keeps us focused on the operating metrics of which we primarily are interested in.

    Thanks again for taking the time to give it another look and best of luck with you investing. JM
    Feb 15 12:21 AM | Likes Like |Link to Comment
  • Apple's Financials: Polished Exterior but Check the Oil [View article]
    Hi Skip,
    Thanks for your response. Rather than spend too much trying to wrap your head around as to why I might be a bugle boy playing to into headwind, I'll offer this.

    I can't get my head around the chartist thing, because I'm not a technician. I have a guy who does that for me. When he screws up which isn't often, it's usually because he was cross eyed from looking at oscillating curves and lines running every which way.
    I'm quite aware the market does not agree with my opinion, but that does not necessarily mean the interpretation of the analysis has failed me.

    I made all my money in AAPL between 2007 and early third quarter 2009. Sure, I wouldn't mind an extra 200 points, but the data said otherwise.

    Apple is one of those companies who has essentially blossomed into a cultural phenomena. What can you compare it to as another benchmark? That leaves it sort of standing by itself. Google is a like a pesky mosquito AAPL has to swat at every once in a while. Inconvenient but it won't cause malaria.

    I would submit that the price movements in the stock are fueled to a greater extent by program trade and HFT which could care less about the fundamentals. When they run for the exits, it will happen quicker than you can say iPod.

    Then there are mutual funds who really started ratcheting things after the summer lows last year.

    In addition there's the diehard loyal like yourself and others who don't want to hear it or have interlopers such as myself come sniffing around. I get more sh*# from you foks than I dish out, but I don't mind. At least I know the whoopin I get here is preferable to a baseball bat, so to speak.

    There's firm conviction, finger pointing amongst yourselves and you guys get to tell me why I make your skivies get all skrunched up.

    Anyways, now that we're 200 points further down the road, all I'm trying to say is that the next 200 or so may not be a cinch like the first one.

    For your 3-5 year train ride to remain "free" it'll have to keep chugging at least as fast as it is now to do so. Just keep an eye on the furnace and hope households have as many Apple products as they do shoes. Then you should be fine.

    The crux of this biscuit is that during the 200 point run up to here, the ambition of the future didn't price in the residual fluff that came from the crammed through accounting changes that Apple lobbied like hell for.

    Think about it. Here's a company with gobs of cash, a fiat currency rushing through incredibly complex accounting changes after asking for more time to comply and then coming out in Dec. and saying "hey remember all the deferred revenues that were building up in the liability section of the balance sheet? "

    "Well, guess what? We got our way with FASB and now all that stuff is on the income statement."

    They had until a year later to adopt, but no. That was good for 50 points towards your train ride. Then, shortly thereafter, upgrades and products releases came marching out like a Rose parade float. A bit theatrical but you catch my drift.

    This probably made up the rest of your train ticket when you throw in the momentum of institutional guys saying "hey we got a live one here"

    So, all I'm saying is if you're willing to carry around 4x sales in your pocket, make sure you still have at least that much when the train gets to the station.
    Feb 13 07:38 AM | Likes Like |Link to Comment
  • Apple's Financials: Polished Exterior but Check the Oil [View article]
    Albert,
    Thanks for your feedback. Perhaps my “too much cash” comment is being taken out of context here. I agree with your point that management is key to the understanding of what makes sense in spending it.

    Herein lies the rub. Accruals are subject to variations and results of input variables and can be broken into two camps for the sake of this discussion: linear and non-linear. I am in the non-linear camp and here’s why.

    Non-linear accruals models in our experience provide substantial “specification improvement”, explaining up to three times the amount of variation in accruals as conventional linear specifications.

    Using Apple as an example, linear models wouldn’t be useful for the one simple fact in your point 1. Too much cash. Sure, they will probably know what to buy, that’s what managers do.

    The problem we see, is that the relationship of cash assets (or even working capital for that matter) ignore the implications of substantially understating the ability of current earnings to predict future cash-flows.

    There's no better anecdotal evidence than AAPL's push and timing of getting their new accounting "hall pass". More importantly, a discounted-cash-flow model would likely point you to a cliff.

    Let’s look at depreciation. Accelerated depreciation is a weighted average giving more weight to recent investments. Given AAPL’s drove of cash, the discretionary factor becomes less relevant (until it is deployed).

    The changes in AAPL’s Q1 2011 net P/P/E for example are substantially less than the adjustments shown in the statement of cash flow. So the current-period and lagged expenditures show us where the “noise” is coming from.

    While we are not accusing AAPL of manipulating earnings, there are anomalies between the timing of revenues, timing of investment outlays, etc. Messy adjustments, so to speak.

    This would change of course with any big ticket acquisition but until then, estimating any expectation of growth in future cash flows could be grossly incorrect going forward. Also, it provides mis-leading estimates of earnings quality.

    So for point 2 of your issue, if you believe my analysis flawed, you are encouraged to explain what exactly or who is mis-interpreting the accruals data. As for your corp. finance buddies, I wouldn’t mind some feedback on what was so ridiculous. If they’re bankers or insurance guys, don’t bother. Those guys are the kings of “skewed”.

    Do I think I’m savvier than AAPL management? Come on Al, this is a forum not a trial. The better question might be, do you think you’re savvier than me?

    It seems my analysis has your craw, but if you think you have a better grasp of accruals, I’d love to hear about it.

    It’s not about being savvier it’s about seeing the big picture. I read your story with the segment analysis; great micro observations, good macro summary. That’s not what we do, but our piece of the puzzle is an important one just like yours.

    Long story short: Apple, great products, phenomenally popular, exciting future, but funky accounting for a company with so much cash. That’s my story and I’m sticking to it.

    Best
    JM
    Feb 11 06:46 PM | Likes Like |Link to Comment
More on AAPL by Jason Merriam
COMMENTS STATS
716 Comments
616 Likes