Misunderstanding Apple

| About: Apple Inc. (AAPL)

Summary

Massive amounts of overseas cash have been accumulated over the years and put to work in long-term securities.

Until recently, the repatriation tax consequences would have been substantial.

The December 2017 Tax Act paved the way for change, but it will be some time before the balance sheet is significantly cleaner.

Introduction

My thesis is that Apple (NASDAQ:AAPL) is still sometimes misunderstood despite its size and the scrutiny surrounding it. The market tends to be efficient much of the time with most large companies, but we still see misleading articles and incomplete calculations for even the biggest companies like Apple.

Repatriation Considerations

It has been a long time since the 2004 repatriation holiday, and Apple has been accumulating cash overseas for years. The latest 10-K through September 2017 states that cash, equivalents and securities held by foreign subsidiaries were $252.3 billion, which was most of the overall balance sheet entries of $20.3 billion in cash/equivalents, $53.9 billion in short-term securities and $194.7 billion in long-term securities.

The 10-Q through December 2017 reveals that the December 22nd tax cuts imposed a repatriation tax. Apple's provisional repatriation tax of $38 billion is based on estimated cash and other assets held by foreign subsidiaries through September 2018.

Misunderstanding "Debt"

The June 8th "Beware the 'mother of all credit bubbles'" article in the Washington Post uses Apple as an example of a company using cheap debt to drive stock buybacks:

Corporate America, in effect, has transformed itself into one giant leveraged buyout.

Consider Apple, the world's most valuable enterprise. As a result of a $100 billion share buyback announced last month, Apple will have returned $210 billion to shareholders since 2012.

Yes, Apple has $101.4 billion in long-term debt in the latest 10-Q filing through March 2018, and some of this debt is for buybacks. However, the company also has $45.1 billion in cash, $42.9 billion in short-term securities and $179.3 billion in long-term securities. Apple has more cash than it knows what to do with, but much of it was trapped overseas until recently. The debt is just a way of allowing the company to make use of some of its cash. Flawed logic is on display when using Apple's debt as an example in a credit bubble argument. It's like saying Peter has a debt problem because he was unable to break his $100 bill, so he had to borrow $20 from Paul.

Misunderstanding Enterprise Value

The GuruFocus Enterprise Value Calculation is incomplete, as the $87.9 billion cash, equivalents and securities subtotal leaves out the $179.3 billion in long-term securities:

From an economic standpoint, it is arbitrary to include a Treasury bill above that expires in 9 months but exclude a Treasury note that expires in 15 months. It is also bizarre to include a corporate bond above that expires in 10 months but exclude one that expires in 14 months.

Closing Thoughts

One shouldn't look at debt in a vacuum. Apple's cash, cash equivalents and securities on the other side of the balance sheet are much larger than its debt obligation. One should contemplate all the securities when looking at enterprise value. A large part of the $179.3 billion in long-term securities deserves consideration, although the $38 billion repatriation tax provision is a partial offset.

Apple was at a better price in early 2013 when I established a big position and wrote an article. At that time, Mr. Market was giving a big discount when folks were worried about margins and other factors. It is still a great company and a fine hold, but the stock is no longer insanely cheap.

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: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.