Apple: The Dangers Of Using Bad Data To Calculate Only One Metric [View article]
The only valid way to determine a company's value is to calculate the present value of its future earnings stream using DCF methods and add that to its current value of cash and investments, patent portfolio, brand, etc. It's the future earnings stream that's the difficult part. My own calcs assuming that annual earnings decline to around $35 billion over the next few years (from a peak of $41 billion last year) and stay there, give a stock value of around $500/share at a 10% discount factor. To get to $240/share, annual earnings would have to decline to around $10 billion. Very unlikely.
Apple: The Dangers Of Using Bad Data To Calculate Only One Metric [View article]
The only valid way to determine a company's value is to calculate the present value of its future earnings stream and add that to its current value of cash and investments, patent portfolio, brand, etc. It's the future earnings stream that's the difficult part. My own calcs assuming that annual earnings decline to around $35 billion over the next few years (from a peak of $41 billion last year) and stay there, give a stock value of around $500/share. To get $240/share, annual earnings would have to decline to around $10 billion. Very very unlikely.
I'll repeat what I've said for many months now. Apple's revenues are flattening and its earnings are declining as it copes with the enhanced competition. The $41 billion ($44/share) it earned last year will prove to be its high water mark. I expect that its earnings will stabilize in the low $30 billions (around $35/share). Buybacks will help the EPS, but at the cost of draining its cash hoard. Considering all of the above, the stock is fairly priced in the $400-500 range. It could go lower if its earnings fall below the above projections. It's very unlikely that it will reinvent the wheel and surge to new highs.
The mortgage REITs are lit up bright red (MORT -1.9%), again led by American Capital Agency (AGNC -3.5%) and American Capital Mortgage (MTGE -3%), with Annaly (NLY -3.1%) not far behind. Yes, the 10-year Treasury yield is a 3 bps higher, but there's also rare action in Fed Funds futures, now pricing in a whopping 50 bps in rate hikes by this time 2016. AGNC presents at the JMP Conference at 2 ET. [View news story]
I'll just stay pat and collect my $1.25 quarterly dividend (for now) and not worry about the stock price. Over the past 3 years the stock has traded around $30/share give or take a few dollars. It is now close to book value and had no business trading at a high premium over the past year or so. I don't worry about mark to market quarterly changes in security values and their effect on book value. Rates will fluctuate but they aren't going up to stay anytime soon. I expect a dividend cut later this year perhaps to $1.10 to keep it in line with net income.
Forget About American Capital, Annaly Capital Is Still The Best Of Breed [View article]
They are per my calcs. Net spread income was $0.78. Dollar roll income was $0.40. Operating earnings was therefore $1.18. That's what matters. I don't care about non-recurring charges. Yes, operating earnings doesn't cover the $1.25 dividend, falling $0.07 short. OMG! They have $1.08 in undistributed retained earnings, so by my calcs, they could cover the dividend for 15 more quarters if they fall $0.07 short each quarter. Let's see how they do next quarter. I'm not going to panic from misleading articles such as this one. Realistically, I expect them to cut the dividend to around $1.10 sometime later this year or early next year.
Forget About American Capital, Annaly Capital Is Still The Best Of Breed [View article]
I only read the first few paragraphs of this article and then dismissed it as a load of rubbish. It doesn't matter that AGNC's BV declined last quarter due to MBS price drops. BV will go up and down q to q with MBS price changes. What matters is their operating earnings which were fine.
Good article Bill. Apple's future earnings are the only thing that matters. The trend is down, and should stay that way for several years as revenues flatten and margins decline. Earnings should be around $40/share this year, down from $44/share last year. This trend should continue for several years until earnings stabilize around $35/share. At that point, I expect that revenues will be in the low $200 billions, with profit margin in the mid teens. The fair value of the stock today is around $500 for the above scenario, so I expect Apple to stay in the $400-550/share range over this period. I don't see it as an investment, just a trade.
American Capital Agency: Not A Terrible Q1, But The Dividend Is Still Not Sustainable [View article]
AGNC can pay the $1.25 dividend for the next several quarters from operating earnings ($1.18 for the last quarter) and undistributed retained earnings ($1.08). They have to pay out at least 90% of operating earnings (i.e., $1.18 x 0.9 = $1.06 for the last quarter). Then when and if their operating earnings and undistributed earnings decline, they will have to cut the dividend. So what operating earnings will they have? Well, that will be based on their spread income and dollar roll income, neither of which can be accurately predicted. I would be surprised to see a cut to below $1.00. Maybe $1.10?
The ABCs Of An mREIT And Its 15% Dividend Yield [View article]
Great article. Short and to the point.
I've been in AGNC for about 2 years now. I just look at what their spread (and now spread plus drop) income is and figure that in the long term they will basically pay out at least 90% of that as dividends. I don't worry about book value. MBS prices go up and down as interest rates fall and rise. The way I see it, if MBS prices held constant and they pay out 90% of their income, the BV should rise by the 10% of income they retain. So with their current $1.18/share earnings and $1.25/share dividend, they're basically in balance. If earnings fall due to shrinking spreads, they'll eventually have to cut the dividend. To hedge against stock price volatiliy, I cover my positions with OTM calls. If the stock is called, I just reenter the position. So far this strategy has worked.
Swept up in the hit to American Capital Agency (AGNC -8.3% AH) is its sister firm American Capital Mortgage (MTGE -5.4% AH). MTGE differs from AGNC in that it invests in non-agency MBS as well as agency paper, but both share Gary Kain as CIO. AGNC's conference call is set for Friday at 11 ET - how much did February's dilutive secondary hit the Q1 numbers? [View news story]
What a bunch of ninnies! Rates drop 4Q12, MBSs rise, and the BV of AGNC soars. Then 1Q13 rates rise, MBSs fall, and the BV drops. The trend reversed again in April. It's the income that counts (spread and drop) and that's doing just fine. The stock will sell off tomorrow and will then recover after the panic sellers bail out. Buying opportunity, definitely.
I've always used DCF present value to determine intrinsic value. The problem with that approach of course is the future earnings stream which is anyone's guess.
Assuming $110 billion as the current value of Apple's $145 billion of cash and investments after repatriation and taxes, a 10% discount factor, and constant earnings streams into perpetuity (CESIP) of $25-$40 billion, I get the following DCF present values:
Sorry for the table format. I can't get it to format correctly.
The total DCF PV ($billion) isn't affected by buybacks. So $60 billion in buybacks reduces the current net value of cash and investments by $60 billion whether cash or debt is used for buybacks. The DCF PV per share is also not affected by buybacks since the decrease in net cash and investments offsets the reduced float.
EPS is, of course, increased by buybacks and everyone hopes that this will increase the stock price. But P/E should fall to offset the increased EPS since the present value is unchanged.
My own opinion? I believe net income is in a muti-year decline to the midrange of the above table ($30-35 billion annually) before stabilizing, and consider the stock to be worth $450-$500 per share. With limited upside, I don't see Apple as a good investment.
Good article Paulo. I am continually amazed by the poor analysis and/or denial expressed by so many Apple longs. As I have said for many months, revenue growth is slowing to a halt and earnings are declining. This trend will continue for several years. Buybacks will increase the EPS over what it would have been without them, but it will not affect total net income or the stock price. To see this, consider the following: Net income was $41 billion last fiscal year. It should come in around $36 billion this year and stabilize around $30 billion in a few years. If buybacks weren't made, EPS at that time would be around $32/share, and the present value of the company would be around $420 billion (using a 10% discount factor and allowing for a $110 billion value of repatriated after-tax cash and investments.) If the stock traded at its present value, it would be around $450/share. However, with $60 billion in buybacks, the number of shares would be reduced around 15% to 800 million. The $60 billion drained from cash and investments would reduce the present value of the company to $360 billion, but the stock price would still be around $450 (if it traded at present value) due to the lower number of shares. It doesn't matter a great deal that the buybacks will be debt financed. Assets less liabilities (i.e., cash and investments less debt) are what matters in determining present value. Yes, EPS will be 15% higher after buybacks than it would have been without them. So the stock will simply trade at a lower P/E. It's just a game of smoke and mirrors, but it makes everyone happy. The bottom line is that Apple is a questionable investment considering the limited upside.
Apple: The Dangers Of Using Bad Data To Calculate Only One Metric [View article]
Apple: The Dangers Of Using Bad Data To Calculate Only One Metric [View article]
Danger Zone For This Week: Apple [View article]
The mortgage REITs are lit up bright red (MORT -1.9%), again led by American Capital Agency (AGNC -3.5%) and American Capital Mortgage (MTGE -3%), with Annaly (NLY -3.1%) not far behind. Yes, the 10-year Treasury yield is a 3 bps higher, but there's also rare action in Fed Funds futures, now pricing in a whopping 50 bps in rate hikes by this time 2016. AGNC presents at the JMP Conference at 2 ET. [View news story]
Forget About American Capital, Annaly Capital Is Still The Best Of Breed [View article]
Forget About American Capital, Annaly Capital Is Still The Best Of Breed [View article]
Forget About American Capital, Annaly Capital Is Still The Best Of Breed [View article]
Buy General Electric - Just Not Yet [View article]
Apple: Too Far, Too Fast? [View article]
American Capital Agency: Not A Terrible Q1, But The Dividend Is Still Not Sustainable [View article]
The ABCs Of An mREIT And Its 15% Dividend Yield [View article]
I've been in AGNC for about 2 years now. I just look at what their spread (and now spread plus drop) income is and figure that in the long term they will basically pay out at least 90% of that as dividends. I don't worry about book value. MBS prices go up and down as interest rates fall and rise. The way I see it, if MBS prices held constant and they pay out 90% of their income, the BV should rise by the 10% of income they retain. So with their current $1.18/share earnings and $1.25/share dividend, they're basically in balance. If earnings fall due to shrinking spreads, they'll eventually have to cut the dividend. To hedge against stock price volatiliy, I cover my positions with OTM calls. If the stock is called, I just reenter the position. So far this strategy has worked.
Swept up in the hit to American Capital Agency (AGNC -8.3% AH) is its sister firm American Capital Mortgage (MTGE -5.4% AH). MTGE differs from AGNC in that it invests in non-agency MBS as well as agency paper, but both share Gary Kain as CIO. AGNC's conference call is set for Friday at 11 ET - how much did February's dilutive secondary hit the Q1 numbers? [View news story]
Demystifying The Microsoft/Apple Comparison Argument [View article]
Apple will never see the $700 mark again unless it does a reverse split.
Apple: Not As Cheap As You Think [View article]
Assuming $110 billion as the current value of Apple's $145 billion of cash and investments after repatriation and taxes, a 10% discount factor, and constant earnings streams into perpetuity (CESIP) of $25-$40 billion, I get the following DCF present values:
CESIP ($billion)/ DCF PV ($billion)/ DCF PV ($/sh)
25/ 370/ 395
30/ 420/ 450
35/ 470/ 505
40/ 520/ 560
Sorry for the table format. I can't get it to format correctly.
The total DCF PV ($billion) isn't affected by buybacks. So $60 billion in buybacks reduces the current net value of cash and investments by $60 billion whether cash or debt is used for buybacks. The DCF PV per share is also not affected by buybacks since the decrease in net cash and investments offsets the reduced float.
EPS is, of course, increased by buybacks and everyone hopes that this will increase the stock price. But P/E should fall to offset the increased EPS since the present value is unchanged.
My own opinion? I believe net income is in a muti-year decline to the midrange of the above table ($30-35 billion annually) before stabilizing, and consider the stock to be worth $450-$500 per share. With limited upside, I don't see Apple as a good investment.
Implications Of Apple Guidance [View article]