Apple Knocked Off As The World's Most Valuable Brand: What's Next?

| About: Apple Inc. (AAPL)

Summary

Explains how Alphabet, with its Google search engine, passed Apple in having the world’s most valuable brand.

A comparative quantitative analysis using a unique free cash flow ratio.

Identifies which company is a better value.

Warns about investing in overbought stocks and markets.

Shows why it is important to concentrate on Main Street when analyzing any company.

On February 2, 2017, a client sent me this article from USA Today: Apple is knocked off as world's most valuable brand by Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and asked me to comment on it, since one of our largest holdings is Apple (NASDAQ:AAPL). In doing so I decided to answer it in a Seeking Alpha article and show which may be a better value on Main Street and Wall Street.

The main points in the USA Today article was as follows:

"The iPhone maker's brand value has plummeted 27% to $107 billion since the start of last year, according to Brand Finance's Global 500 2017 report. Google's brand, however, is now worth $109 billion, making it the most lucrative in the world. It is the first time the search giant has topped the list since 2011."

The author then went on about "tech crazed consumers" losing interest in Apple's products and then tore apart the Apple Watch. Finally he concluded his Apple bashing by saying that Apple is no longer innovating. I was ready to write my client back and tell him to ignore the article, as I was not very impressed with how Brand Finance's grading of brands was done, as brand value (in my opinion) works off of emotion.

Both brands discussed are stellar, but I would dare anyone to try and take my wife's iPhone or Apple Watch away from her. She also loves Google Search as well, but given a choice of giving up her Google Search Engine or her Apple devices and I assure you Apple wins every time. Brand reports are like presidential polls and everyone knows how those polls did in correctly picking the 45th President of the US.

Again both brands are stellar, but trying to say which one is best is a matter of opinion and is like trying to determine who was a better guitarist - Jimi Hendrix or Stevie Ray Vaughn. I love listening to both, just as I love using Google on my iPhone, so why should I waste my time trying to determine which is better? Just as I was about to write my client back and tell him to ignore the article, the author saved the day by telling us the following:

"This week, however, Apple showed that its signature iPhone still has the potential to be a profit machine, buoying investors.

Robust sales of the iPhone 7 and iPhone 7 Plus over the holidays led to the tech giant to just report it earned $17.9 billion, or $3.36 a share in the first fiscal quarter ended Dec. 31. Though the net income was off 2.7% from $18.4 billion in the same quarter a year ago, revenue was a record-setting revenue of $78.4 billion. Apple beat analysts' profit expectations.

Meanwhile, Google's parent company Alphabet reported net income of $5.33 billion, or $7.56 per share, for the fourth quarter. It missed analysts' estimates, though revenue soared 22% to $26 billion. The revenue growth was propelled by mobile search, video ads, and its expansion in newer business lines like cloud computing."

So, rather than wasting everyone's time on further delving into which company has a better brand, what I prefer to do instead is use a few unique ratios that I created and do a free cash flow analysis of both companies on Main Street in order to determine which is a better value for an investor on Wall Street.

When analyzing almost any company, concentrate on its free cash flow generation as that is where the rubber hits the road when it comes to finding out the truth. Before I show you a long-term Datafile for Google, let us first do a TTM (trailing twelve month) analysis of its Bernhard Buffett Free Cash Flow and then compare it to its current price.

Here are the two ratios that we will be using in our analysis, and for those new to this type of analysis, one can get a good introduction by reading my previous analysis of Apple by clicking here. Since I will be analyzing Apple here again, we will therefore get a second opportunity to determine if there have been any changes to its valuation since I wrote my last Apple article on December 19, 2016.

Price-to-Bernhard Buffett Free Cash Flow Ratio = Sherlock Debt Divisor/ [(net income per share + depreciation per share) + (capital spending per diluted share)]

Sherlock Debt Divisor = Market Price Per Share - ((Working Capital - Long-Term Debt)/Diluted Shares Outstanding)

Alphabet

Market Price Per Share = $820.13

Working Capital = Total Current Assets - Total Current Liabilities

Total Current Assets = $105,408,000,000

Total Current Liabilities = $16,756,000,000

Working Capital = $88,652,000,000

Long-Term Debt = $3,935,000,000

Diluted Shares Outstanding = 700,200,000

Sherlock Debt Divisor = Market Price Per Share - ((Working Capital - Long-Term Debt)/Diluted Shares Outstanding))

Sherlock Debt Divisor = $820.13 - (($88,652,000,000 - $3,935,000,000)/ 700,200,000))

Sherlock Debt Divisor = $820.13 - $120.99 = $699.14

Since Alphabet has less Long-Term Debt vs. Working Capital, we therefore must reward it and use the $699.14 result as the new numerator in all our calculations.

Price-to-Bernhard/Buffett Ratio = Sherlock Debt Divisor/ [(net income per share + depreciation per share) + (capital spending per diluted share)]

Sherlock Debt Divisor = $699.14

Net Income per diluted share = $19,478,000,000/700,200,000= $27.82

Depreciation per diluted share = $6,144,000,000/700,200,000= $8.77

Capital Spending per diluted share = $-10,212,000,000/700,200,000= $-14.58

$27.82 + $8.77 + ($-14.58) = $22.01

Price-to-Bernhard/Buffett Free Cash Flow Ratio = $699.14/$22.01 = 31.76

Now if you go to my Friedrich Legend (on what is considered a good or bad result), you will notice that our result of 31.76 is a poor result.

We last ran our Datafile for Alphabet on February 5, 2017, and our Friedrich Algorithm gave a recommendation to our subscribers that Alphabet is "overbought" as our Friedrich Chart and Datafile below show.

Here is the chart of our Price-to-Bernhard Buffett Free Cash Flow ratio results for Alphabet:

The Price-to-Bernhard Buffett Ratio considers a stock a bargain when it trades under 15 times and overbought when it trades over 30 times. Therefore, from the current results in the chart above Alphabet is "overbought" per our ratio and has been so for some time now.

Let us now compare those results to Apple's and see how it does.

Here is our Price-to-Bernhard Buffett Free Cash Flow Analysis for Apple.

Apple

Market Price Per Share = $129.08

Working Capital = Total Current Assets - Total Current Liabilities

Total Current Assets = $103,332,000,000

Total Current Liabilities = $84,130,000,000

Working Capital = $19,202,000,000

Long-Term Debt = $73,557,000,000

Diluted Shares Outstanding = 5,328,000,000

Sherlock Debt Divisor = Market Price Per Share - ((Working Capital - Long-Term Debt)/Diluted Shares Outstanding)

Sherlock Debt Divisor = $129.08 - (($19,202,000,000 - $73,557,000,000)/ 5,328,000,000))

Sherlock Debt Divisor = $129.08 - ($-10.20) = $139.28

Since Apple has more Long-Term Debt vs. Working Capital, we therefore must punish it and use the $139.28 result as the new numerator in all our calculations.

Price-to-Bernhard/Buffett Ratio = Sherlock Debt Divisor/ [(net income per share + depreciation per share) + (capital spending per diluted share)]

Sherlock Debt Divisor = $139.28

Net Income per diluted share = $45,217,000,000/5,328,000,000

= $8.49

Depreciation per diluted share = $10,538,000,000/5,328,000,000

= $1.98

Capital Spending per diluted share = $-12,456,000,000/5,328,000,000

= $-2.34

$8.49 + $1.98 + ($-2.34) = $8.13

Price-to-Bernhard Buffett Free Cash Flow Ratio = $139.28/$8.13 = 17.13

17.13 is considered an above average result for this ratio.

The above chart's results are backed up by our Apple's Datafile and Quantitative Chart below, which clearly show that Apple has a long history of quality performance along with attractive valuations.

Going forward, using our Friedrich Investing System, Alphabet is "Overbought" while Apple comes in as a "Strong Hold." It's amazing to us that Wall Street is so confused about Apple in that it actually brought its shares down to $90.34 on May 12, 2016, which had our Friedrich Algorithm signal Apple as a "Strong Bargain" then and a "Super Six" score, which is our highest ranking. It also amazes us how a company that generates $53 billion in free cash flow can give off any doubt as to how it is doing on Main Street.

When Steve Jobs resigned as Apple CEO in 2011, Apple had total revenue of $108 billion and today under Time Cook it has $218 billion TTM. Tim Cook is obviously doing an amazing job as CEO and probably one of the best decisions Steve Jobs ever made was in having Tim Cook replace him.

Alphabet is an amazing company and continues to knock the ball out of the park on Main Street, year in and year out, but Wall Street in our opinion has brought its share price to an "overbought" level along with the markets in general. For those of us who lived through the market actions of 1998-2001, where the Nasdaq hit 5048 on March 10, 2000, and then proceeded to fall to 1,139 by October of 2002 (-77.43%), to only plummet again in 2008-2009, shows just how important it is that all investors understand valuations on Main Street vs. Wall Street. For those who bought on March 10, 2000, and held through the carnage, it would have taken them until May 15, 2015, to make their money back.

It's not the companies fault that these things happen as companies like Microsoft (NASDAQ:MSFT) continued to produce returns on equity of 20%-plus throughout those years, but because its shares were so "overbought" in 2000, it took more than 16 years for its share price to recover.

And the way Microsoft is being run these days, investors in that stock may be in for a little shock coming up as this is what is happening on Main Street, as tracked by my Friedrich Algorithm.

In conclusion, it is my belief that free cash flow analysis is the ultimate tool when analyzing companies, and my hope is that you may add these ratios to your own investor tool box in order to help you in your own due diligence. If you have any questions, please feel free to ask them in the comment section below and don't forget to hit the "Follow" button after our Friedrich Research username on top as we plan to do many more comparative case studies like this one in the near future.

Disclosure: I am/we are 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.

Additional disclosure: DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

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