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Philip Mause
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My name is Phil Mause. I am a Senior Advisor with the Pacific Economics Group, focusing on energy, regulatory and valuation issues. I retired from 40 years of law practice earlier this year. I am a yield oriented investor and in the last two years, I have done reasonably well in junk bonds,... More
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  • Apple Is Priced For No Growth At All

    Apple (NASDAQ:AAPL) has just reported year end earnings and, as the dust settled, the stock sank and wails of disappointment were heard. Concerns are periodically expressed about whether AAPL can continue on its growth trajectory and simple math certainly suggests skepticism. AAPL's 2012 results reveal year over year gross revenue growth of over 45% and net income growth of more than 60%. Because AAPL is already very large indeed, continued growth at that rate would, if compounded not too far into the future, gobble up the entire planet's GDP. AAPL is still projected to grow but a slowing of the pace is virtually inevitable - especially at a time in which overall economic growth is sluggish. So, investors counting on a continuation of the past rate of growth are almost bound to be disappointed.

    This would all be very bad news for the stock if it were priced at a level consistent with explosive growth projections. However, based on reasonably conservative calculations, the stock - which closed Friday at $603.36 - is actually priced for no growth at all. Put another way, if AAPL were to earn exactly what it earned in fiscal 2012 plus inflation from now until the end of human history (which, given what is happening to the climate, may not be very far off) buying the stock at $603.36 would be an excellent investment - especially in the current low interest rate environment.

    I use a methodology called EPEE which calculates what a shareholder is paying for the operating company itself by separating out the balance sheet cash or debt. In the case of AAPL, this involves subtracting balance sheet cash from the market cap and subtracting the after tax interest income on the cash from total earnings. After these subtractions, the price being paid for the business itself can be compared with the earnings of the business itself to generate "EPEE" - the enterprise price/enterprise earnings ratio.

    In the case of AAPL. using a fully diluted share count of 948 million shares, I calculated a market cap based on Friday's close at $572.0 billion. Balance sheet cash (including long and short term investments) totals $121 billion and so enterprise price is $451.0 billion (this is what a buyer of the stock right now is actually paying for AAPL's business). 2012 earnings were $41.7 billion. AAPL's earnings announcement did not contain information concerning the amount of interest earned on its balance sheet cash, so I used last year's interest rate of .77% applied to an average cash balance of $110 billion to estimate before tax interest income at $850 million and after tax interest income at $600 million. This, subtracted from total earnings of $41.7 billion yields enterprise earnings of $41.1 billion.

    At this point, we can compare the price a shareholder is paying for the enterprise with the earnings of that enterprise. Dividing 41.1 into 452.0 produces an EPEE of 11.0. If you buy AAPL at Friday's closing price, you are buying a rapidly growing and highly innovative company with a fanatically loyal customer base for 11 times earnings.

    I am not going to suggest that this methodology is the only way to look at value. Some commenters have argued that the cash should be discounted due to either the cost of repatriation or the inherent danger that management will spend it in unproductive ways. Dividend yield is still below 2% with annual dividends at $10.60 and, while this is low in today's market, the balance sheet cash and the continuing strong cash flow suggest that it is almost inevitable that dividends will be increased over time. I would love to see an aggressive share repurchase program but I am also not inclined to second guess AAPL's management.

    If AAPL never grows beyond the rate of inflation, its strong cash flow and balance sheet cash would support an aggressive share repurchase program which, in and of itself, could push earnings per share up by some 20 to 25%. Of course, if interest rates increase, the balance sheet cash will virtually automatically start throwing off more revenue. I have explained in an earlier article how a no growth company priced at 16 times earnings can be a reasonable investment in this interest rate By the same token, a strong growth company priced at 11 times earnings is an absolute steal.

    Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: AAPL, long-ideas
    Oct 28 12:45 PM | Link | 1 Comment
  • Rip Redux: Financial Headlines From The Future

    Washington Irving's classic tale involves Rip Van Winkle falling asleep and waking up 20 years later in a different world. I have been ruminating on the question of what the world will look like in 20 years and the best way to approach the issue is to imagine what the headlines will look like. Here's what I think we will see in Wall Street Journal and the Financial Times in 2032.

    1. Federal Reserve Clarifies "Extended Period" Language: Zero Interest Rates to Last Until At Least the Third Quarter of 2087 in Order to Support Sluggish Economy.

    2. Wal-Mart (NYSE:WMT) Winds Up Stock Repurchase Program with Purchase of the Last 100 Shares for $300 Billion: Complex Corporate Governance Issues Arise With the Abolition of Shareholders

    3. Analysts Downgrade Seagate (NASDAQ:STX): Disk Drive Sales Expected to Decline Next Year.

    4. Final Touches Put on Dodd-Frank Regulations: Court Challenges to Controversial Rules Set to Commence Next Year.

    5. Net Corporate Balance Sheet Cash Hits $15 Trillion Mark: Repatriation of Cash to USA Would Involve Insuperable Shipping and Handling Problems

    6. Republicans Get Serious About the National Debt: Promise to Balance the Budget by 2167 if Projected 8% Annual GDP Growth Can be Achieved.

    7. Japan's "Lost Century" Continues: GDP Growth Falls to .000001 Per Cent.

    8. Greenland Beach Resorts Deserted Due to Oppressive Heat; Global Warming Debate Still Unresolved.

    9. ECB and Bundesbank in Talks Over Funding Solutions: Bail Out of All 13 Euro Countries, Leading Banks and 23 Special Purpose Entities Created To Assist in Sovereign Finance Tabled Until Bond Buying Dispute Can Be Resolved.

    And the 10th Headline from 2032 will be???????

    Disclosure: I am long WMT, STX.

    Sep 02 12:36 PM | Link | 1 Comment
  • Back From Jury Duty And Europe

    I have been out of circulation for about 4 weeks after a long stint of jury duty and then an enjoyable trip to Amsterdam (no - I didn't have anything stronger than coffee in any of the "coffee" houses over there).

    It is getting a little harder to find bargains in the stock market but I still hold to the view that megacap tech stocks are cheap. The Netherlands did not exhibit any of the gloom one would associate with a pending crisis in Europe although on blokarting establishment we had anticipating visiting had just closed down. A very inspiring visit to the Anne Frank House. We also had a great day trip to The Hague and saw the Escher Museum, the Panorama and the Madurodam. The Indonesian food in Holland is unlike anything we have had back in the USA and is alone worth the trip - I wonder what it is like in Indonesia.

    On return, Washington seems to be humming along although we just can't seem to get accustomed to having a first place team in a major sport. I think people may be coming around to the view that part of the economic problem is structural (lots of people want to go to nursing school, lots of nursing jobs available, but a bottleneck at the educational level). We may have to think about a major overhaul of the educational system and perhaps more flexibility for employers in terms of wages and hours and temporary hiring. I think Romney would go for a major tax cut and an aggressive program to streamline business regulation - a little like Reagan's first term. I am surprised to look at the numbers in Ryan's "aggressive" balance the budget plan - deficits for probably the rest of my lifetime unless I wind up in Ripley's Believe It or Not for longevity. I think that concern about the deficit is something that the politicians feel necessary to verbalize but not internalize. Perhaps that is for the best until the economy gets going again.

    I still think that this Bull has a ways to run largely because of the low interest rates and their implications for PE multiples and dividend yields. The "desperately seeking yield" phenomenon I discussed more than a year ago is playing itself out as utility stocks and other dividend yielders have done very, very well. I think we will see more emphasis on returning money to shareholders through dividends and share repurchases and more cash for stock takeovers. We may be entering what will someday be called "The Golden Age of Financial Engineering."

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 30 10:05 PM | Link | Comment!
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