Marwaan Karame

Long/short equity, value, research analyst, economic value analytics
Marwaan Karame
Long/short equity, value, research analyst, economic value analytics
Contributor since: 2012
Company: IDG Capital Group, Inc.
Thanks for clarifying. However, I did understand what you were saying, which assumes that all other shareholders have the same belief and that "they know" the value is $2,500 to $3,500 a share. This might be your valuation, but if they all believe this, then the share price would not currently be trading at around $636. If a buyout did occur and management had to pay the premium you were suggesting, then you would not have to wait for your valuation and you would be better off getting your money now versus later.
Thanks 2414163. Excellent and well thought counter argument. Kind regards - Marwaan.
Thanks for your feedback.
Your comment that the value of the company is $1,250 "without any new products" and $2,500 to $3,500 based on "future products and earnings" suggests that a buyout of the company at its current price of $634 or even twice that, would in fact make a lot of sense. If the market is pricing the stock at $634 now, yet you feel that the value is more like $2,500 to $3,500, then this story has a lot of merit.
In order for this not to be the case, one must make a less probable assumption that the stock price would shoot up by at least 300% and possibly north of $2,500 immediately after the announcement of a buyout or that the buyer would actually start with an opening bid that was at a 300% premium to today's price.
In terms of the amount of money out there, I think its anyone's guess. The Fed has been pumping a lot of money into the market and there is a lot of money looking for a place to park itself. Although to most of us, the amount of money seems extraordinary, I think we underestimate how much money is truly available and how eager financial sponsors might be in executing such a historical buyout. It would be "career suicide" if an institutional investor did not participate. However, given your valuation, this would be one of the safest bets regardless of its size.
That said, the article is not predicting a leverage buyout but suggesting that Apple's debt capacity is so significant that a leveraged management buyout is not out of the question, especially if your estimate of Apple's value of $2,500 to $3,500 is correct. The more important point of this article is that by simply taking on more debt, of which Apple can handle better than any other company given its cash flow, Apple will effectively transfer billions of dollars of value from the Government to shareholders.
Where your valuation of $2,500 to $3,500 depends on less certain assumptions of product development, the value available today through the use of additional debt is much more certain.
Thanks for your comment AkshayB.
As for your question on whether I took into account the uncertainty of ownership, I believe I did. The main reason for my very conservative estimates was based on the ownership structure.
However, the ownership structure may be a positive factor, which would make my estimates ultra-conservative. I'm not a CPA, but there might be some tax advantages associated with this structure that the company doesn't care to advertise and is perhaps why they haven't addressed it more clearly. That said, I'd be interested for any corporate tax accounts or tax lawyers to chime in.
Thanks for your comment Buddy. I agree that the companies selected are not a pure play peer set. If anything, it represents a broader ecosystem of Healthcare related companies.
However, that wouldn't impact the accuracy of the EVA model. If anything, the range estimates might be less precise or not as narrow as they could be with a pure play peer set, but the wider ranges would mean the analysis is more conservative. To clarify, when I think of accuracy I think in terms of whether the outcome will fall within my estimated range. When I speak of precision, I think of how narrow my estimated range will be. By example a point estimate would be very precise, but would be completely inaccurate if it is not exactly in line with the outcome.
In any case, I appreciate your comment. Thanks again.
For those who were able to hold on to QCOR over the last 12 months, congrats.
Excellent article.
Congrats heliskiier. You got an amazing deal.
Hello Bernasca,
I won't profess to be an expert on the day to day trading activities of the market, as I tend to agree with Benjamin Graham's metaphor of "Mr. Market", an emotional wreck with major mood swings from excessive highs to suicidal lows.
That said, if calls are outnumbering puts by 3 to 1, then this looks like a very positive sign. Obviously the operating numbers and results were very good. Therefore, short sellers have there back to the wall. Misinformation is the only weapon for short sellers when a company like this has such strong fundamentals. However, short sellers can only pull the elastic band so far before it snaps back violently.
One possible scenario is that major investors are trying to bate more short sellers into the frenzy, while silently increasing their long position at a lower share price. I think it will then become a question of who is left holding the bag.
In any case, the question still remains on valuation. I tend to look at it from the stand point of owning a company versus owning a stock. If I were to buy this company outright at the current price, would I be getting a good deal? The answer is absolutely yes. At some point, a big pharma company will think so too. Big Pharma is desperate for growth and are willing to pay a significant amount for it. QCOR has that growth, and more importantly, profitable growth.
Hello Isaac,
The numbers clearly indicate that the current business model is solid. That can't be questioned. However, what can be questioned is the sustainability of this business model.
As a result, I took the dim view that the company would be unable to sustain its competitive advantage, as indicated by declining revenue growth and spreads. The analysis assumes exactly what you are saying, which is the company will have to become more competitive in its pricing as competitive pressures mount. And yet despite these assumptions, the fair value is clearly an attractive buy.
What is perhaps neglected in this analysis, is that there are 18-19 other indications all of which represent a market, of which have not been exploited. Add in the fact that the company is a very good acquisition candidate, as big pharma desperately attempts to back fill their portfolio of patent expiring drugs, and you are left with a company with significant upside.
Thank you Jennifer ... lol (i.e. your last sentence)
Thank you Sensible Investor.
Thanks drdon.
Thanks Jerry. However in all honesty, it could have easily gone the other way today and still could. That said, over the long-term I'm confident (95% to be exact) that the price will increase to reflect the underlying value.
Thanks ggpique. I agree, this pull back has been a great opportunity to buy more shares.
I have seen no news or evidence of this, so it is tough to comment.
I believe it may be due to a knee jerk reaction to a recent S-3 filing. A lock-up agreement is about to expire towards the end of June and those early investors are simply registering these shares so that they can sell them if they choose to. Also, warrants may be exercised, which might help the company with additional working capital needs, given their recent distribution agreement with Walmart for 900 stores, as well as their recent agreement with Cincinnati Bell. In my opinion, the long-term prospects still look very promising.
As I mentioned in one of the other comments, the valuation is not intended for trading, but rather a 12 month outlook. I conceded that despite the share price increasing to $628 shortly after putting out this article, that the share price could easily go in the opposite direction. In fact, I think linear thinking works better for the short-term, rather than the long-term, as most studies have shown through short-term price momentum. That said, we have approximately 11 months to see whether your comment holds true.
David - out of curiosity, how did you calculate 270% ROIC. What economic adjustments did you make to NOPAT and Capital? Again, great article.
Fair point Onlinden - It's true. I am looking it from a long-term investment standpoint, versus short-term trading perspective. $vix may have it right in the short-term.
$vix - I guess it depends on whether a person distinguishes between price and value, in that "price is what you pay and value is what you get ". Given the "fair value" as defined by the discounted Economic Value or Cash Flow (both mathematically equivalent), Apple's share price is a healthy discount to its value. It was undervalued 24 days ago and even more so now.
Why is the price lower? Greece, Euro, elections, uncertainty, fund managers need to realize returns and payoff withdrawals, the "price is too high", etc... There are a million reasons, and I'm not sure which one it is, but it isn't because the value is less than the price.
Excellent article David.
My analysis also suggests that Apple is very undervalued. A company with such a high return on capital and revenue growth, indicates a strong sustainable competitive advantage over its rivals and formidable bargaining power to extract a greater share of Economic Value from both its suppliers and customers.
Not to mention, the balance sheet is quite conservative with limited leverage. More value could be created for shareholders without any improvement in the company's operating performance by simply taking on a little more debt to lower its cost of capital, while still maintaining a very conservative balance sheet.
In any case, great analysis, great company, and great investment. Its only a matter of time for the share price to reflect it.
I use both excel and @Risk by Palisades. For this analysis, N was 1,000, however, you can easily run 10,000 scenarios in @Risk in a fairly short period of time. I'm a big fan of @Risk.
On a related note, that is pretty cool that you use it in nuclear particle prediction. Wow. Obviously much more sophisticated and complex then valuation. Out of curiosity, what type of random number generator do you use?
Thanks ehizzo.
Thanks Ron, much appreciated.
STU - I also found it quite suspect given both the timing and the level of short interest. Devin Stevenson's article "Don't Worry, There Is No Fraud Here", was an excellent rebuttal and I think was spot on. He saved me some work. Interesting enough, when I just googled "ZAGG short squeeze", ZAGG was listed as one of the top 5 short squeeze stocks as of April 12, 2012.
Excellent article Devin. Thank you.
Thanks wxboy25. Much appreciated.
Thank you Jon. Much appreciated.