AAPL - Apple Inc.

[Picasso]

I agree that Apple has something much better than the graveyard of previous phone makers.  Assigning a high multiple to Apple is the same as betting the fate of their phone profits will not be cyclical. 

 

At the end of the day, it isn't a bad thing that Apple stock is undervalued.  They'll hopefully be buying up a lot of stock and you can reinvest the dividends if Apple is the best use of your capital.  I just have issue with people who want this to trade for 20-25x earnings because of the growth rate.  The margin of safety disappears if the stock trades as if this is a recurring revenue business model.  Although some fervent bulls would argue it is.

 

A perpetually cheap growth stock is nice because you never make the silly decision of selling it.  But I've probably spent more time on this than I should since I'm not planning on buying Apple stock with my capital at these prices.

[Liberty]

I'm not saying it should necessarily trade at 25x, but trading at 7x FCF ex-cash is a bit ridiculous.

 

Not that I'm complaining. I agree with you that it's good if it stays cheap rather than become expensive.

 

It's just quite clear to me that it's not become something is big and very scrutinized that the level of average level of understanding of market participant is high. I wrote about this earlier in this thread, so I won't repeat it, but those who think megacap are necessarily efficiently priced haven't made money on BAC and AIG... Or Apple in the past couple years for that matter.

[innerscorecard]

I think it's unrealistic to expect that Apple should trade for 20-25x earnings. I guess Icahn and Einhorn want that to happen, but I'm not sure if they really expect that to ever happen, or are just being disingenuous. I don't expect it to happen. That's not why I'm in the stock.

 

A perpetually cheap growth stock is nice because you never make the silly decision of selling it.

 

Wise words. Agree.

[jawn619]

I think it's unrealistic to expect that Apple should trade for 20-25x earnings. I guess Icahn and Einhorn want that to happen, but I'm not sure if they really expect that to ever happen, or are just being disingenuous. I don't expect it to happen. That's not why I'm in the stock.

 

A perpetually cheap growth stock is nice because you never make the silly decision of selling it.

 

Wise words. Agree.

 

I think they are a little promotional when they talk about what a fair price for Apple should be. Yet at current prices you are getting a 15%+ cash yield from holding one of the best businesses in the world. Also Apple's cost of capital can be really low if they start issuing some debt, increasing intrinsic value further.

[portfolio14]

I think it's unrealistic to expect that Apple should trade for 20-25x earnings.

 

Not sure why you think that has to happen to have a valid investment case. Take Liberty's 7x FCF figure. That's 14% FCF yield. Give a moderate growth of 3% (just to catch up with inflation) or a bit more aggresive 5%, it's 17-19% ROIC, my capital!

 

The low share price is great. I don't even have to increase my position. Tim Cook will do that for me.

 

By the way, if I remember correctly, Apple was way north of 25x a decade ago when it was a single product (iPod) company.

[innerscorecard]

I think it's unrealistic to expect that Apple should trade for 20-25x earnings. I guess Icahn and Einhorn want that to happen, but I'm not sure if they really expect that to ever happen, or are just being disingenuous. I don't expect it to happen. That's not why I'm in the stock.

 

A perpetually cheap growth stock is nice because you never make the silly decision of selling it.

 

Wise words. Agree.

 

I think they are a little promotional when they talk about what a fair price for Apple should be. Yet at current prices you are getting a 15%+ cash yield from holding one of the best businesses in the world. Also Apple's cost of capital can be really low if they start issuing some debt, increasing intrinsic value further.

 

And indeed, they have been taking on some debt. They are making good capital allocation decisions, and have been. Rare in their industry.

[innerscorecard]

I think it's unrealistic to expect that Apple should trade for 20-25x earnings.

 

Not sure why you think that has to happen to have a valid investment case. Take Liberty's 7x FCF figure. That's 14% FCF yield. Give a moderate growth of 3% (just to catch up with inflation) or a bit more aggresive 5%, it's 17-19% ROIC, my capital!

 

The low share price is great. I don't even have to increase my position. Tim Cook will do that for me.

 

By the way, if I remember correctly, Apple was way north of 25x a decade ago when it was a single product (iPod) company.

 

I don't think it has to be happen at all for Apple to be a good investment. After all, Apple is my single largest position at this time. I just don't see the point of exaggerating rather than being honest, even if the exaggeration would support my interests.

 

I also don't think previous higher multiples are all that relevant to the company's situation now. The company obviously had a much bigger runway for growth then as compared to now, even without knowing the future. Not to say that there isn't a lot of growth ahead now. But Apple produces a lot more cash than it needs now, and that wasn't really the case then. Management obviously recognizes this, which is why they are returning so much money to shareholders.

[portfolio14]

Btw, if Apple keeps on screwing up their cloud service initiatives like this,

 

http://www.patentlyapple.com/patently-apple/2015/08/is-apples-ceo-tim-cook-a-hypocrite-of-the-highest-order.html

 

sooner or later they will destroy their brand. Maybe 7x is justified then.  >:(

[Liberty]

Bought a little more at 112.20. Thanks Mr. Market!

 

Edit: Looks like I bottom-ticked it. Maybe I should have been a day-trader. Ha! ;D

 

Also: http://www.wsj.com/articles/ibm-apples-rival-turned-partner-plans-to-help-other-companies-adopt-macs-1438765914

[Viking]

Here is a good analysis of Apple's cash and debt. Net cash currently sits at $26/share; the author adjusts for what Apple needs to run the business ($20 billion) and for repatriation taxes and comes up with $17/share as an adjusted net cash per share number. Logic looks reasonable to me: http://www.forbes.com/sites/chuckjones/2015/07/31/apple-has-less-cash-than-people-believe/2/

 

Shares are trading at about $117. If you subtract adjusted net cash you get $100. Fiscal 2015 (to Sept) earnings will be just over $9. Fiscal 2016 earnings are estimated at $10. Adjusting for net cash (including leaving $20 billion to run the business and paying taxes on the international portion) you get a PE of 11 (current year) and a PE of 10 (next year, starting Oct 1). Very cheap for a company the quality of Apple.

 

Yes, there are risks to owning Apple. However, at current prices investors appear to be saying that the new product pipeline is dead. I think Apple watch will be a solid product for the company but it will take 3 or 4 years to start to shine. Revamped Apple TV is coming. iPad Pro is likely coming. Lots of solid line extensions also coming to keep current product categories rolling. Great time to be an owner of the shares... Lots of tailwinds.

[DeepSouth]

Here is a good analysis of Apple's cash and debt. Net cash currently sits at $26/share; the author adjusts for what Apple needs to run the business ($20 billion) and for repatriation taxes and comes up with $17/share as an adjusted net cash per share number. Logic looks reasonable to me: http://www.forbes.com/sites/chuckjones/2015/07/31/apple-has-less-cash-than-people-believe/2/

 

Shares are trading at about $117. If you subtract adjusted net cash you get $100. Fiscal 2015 (to Sept) earnings will be just over $9. Fiscal 2016 earnings are estimated at $10. Adjusting for net cash (including leaving $20 billion to run the business and paying taxes on the international portion) you get a PE of 11 (current year) and a PE of 10 (next year, starting Oct 1). Very cheap for a company the quality of Apple.

 

Yes, there are risks to owning Apple. However, at current prices investors appear to be saying that the new product pipeline is dead. I think Apple watch will be a solid product for the company but it will take 3 or 4 years to start to shine. Revamped Apple TV is coming. iPad Pro is likely coming. Lots of solid line extensions also coming to keep current product categories rolling. Great time to be an owner of the shares... Lots of tailwinds.

 

Apple is 0.7X levered with >80% FCF/EBITDA conversion (though FCF is heightened by deferral of foreign taxes); Apple never has to pay back its debt (just roll it into perpetuity) and certainly doesn't need tens of billions on hand just for the purpose of paying back laddered debt.

[Viking]

Deepsouth, I agree with you. Many people comment how you can't factor Apple's cash hoard when valuing the stock. I think the summary I linked to presented a pretty solid 'worse case' way of valuing Apple's large net cash position when valuing the company.

[Viking]

For those who feel iPhone is too large a part of Apple's business here are some interesting thoughts from Bennedict Evans: http://ben-evans.com/benedictevans/2015/5/13/the-smartphone-and-the-sun

 

My take: the iPhone is the sun. The Mac, iPad, Apple TV and Apple Watch are all planets. Line extensions like Mac Pro, iPad mini are moons. The OS and related software, App Store etc is like the gravitational pull holding the solar system together.

 

What if we are just at the beginning of the smartphone as sun universe with many decades of growth ahead. The sun is still growing in size and intensity. Many planets (and moons around existing planets) have not yet been discovered. The gravitational pull is still growing in strength. Perhaps Apple growing iPhone so quickly IS actually actually a very good thing as it will provide the core product to achieve many decades of growth. I am not saying this WILL happen. I present this summary as a counter to the concerns that people have that the iPhone will flame out as a successful product in a few years and Apple is doomed. Reality for Apple will likely be somewhere in between.

 

Android would represent another universe. It also has a sun and planets and is held together by an OS. I know what universe I would rather live in. As an investor I also know what inverse I would like to be invested in.

[Liberty]

Deepsouth, I agree with you. Many people comment how you can't factor Apple's cash hoard when valuing the stock. I think the summary I linked to presented a pretty solid 'worse case' way of valuing Apple's large net cash position when valuing the company.

 

A company that does what Apple does to minimize taxes won't just stupidly repatriate cash they don't need and pay full taxes on it. Chances are they'll just keep borrowing against it at ridiculously low rates to fund buybacks and will wait until there's a better deal offered by the politicians. The US tax system is overdue to be updated and made more competitive internationally, so being patient will probably be worth it.

[Viking]

Liberty, I agree. :-)

[abcd]

Does anyone know the reason behind Apple issuing debt overseas? Does this mean, apple can bring the money raised overseas (in the form of debt) home and use it for shareholder returns without paying taxes on it?

[jawn619]

Does anyone know the reason behind Apple issuing debt overseas? Does this mean, apple can bring the money raised overseas (in the form of debt) home and use it for shareholder returns without paying taxes on it?

 

1. They can borrow at a lower rate.

2. I believe they can use the proceeds to buy back stock tax free. The cash brought back from overseas is being taxed because it was a result of income.

[DeepSouth]

Does anyone know the reason behind Apple issuing debt overseas? Does this mean, apple can bring the money raised overseas (in the form of debt) home and use it for shareholder returns without paying taxes on it?

 

Apple issues all of its debt in the US. Though some of it is raised by foreign banks (Mitsubishi, CS, etc) in foreign currencies (JPY, EUR, GBP, CHF), it is issued at the US corporate level. All cash raised can be used for buybacks/dividends with the interest being tax-deductible at the US tax rate.

[Liberty]

11 million trials in 1 month: http://www.usatoday.com/story/tech/2015/08/05/apple-music-hooks-11-million-trial-members-app-store-has-record-july/31197721/

[DCG]

Are there any reasonably-priced CarPlay receivers out there that you can install on older cars? Or are there any good bluetooth car stereos that let you fully control your music/podcasts from the dashboard? I just want to be able to listen to my music in my car without having to take my phone out of my pocket every time I get in the car.

 

 

That being said, I think CarPlay has enormous revenue potential, depending on Apple's revenue model for it, and their ability to convince auto manufactures to include it (how does a car manufacturer decide whether to include CarPlay or Google's car device?).

[rkbabang]

Are there any reasonably-priced CarPlayer receivers out there that you can install on older cars? Or are there any good bluetooth car stereos that let you fully control your music/podcasts from the dashboard? I just want to be able to listen to my music in my car without having to take my phone out of my pocket every time I get in the car.

 

 

That being said, I think CarPlay has enormous revenue potential.

 

http://www.crutchfield.com/g_300/All-Car-Stereos.html?tp=5684##&nvpair=AG_iPod%2FiPhone%20Control%7CFFCarPlay

 

[DCG]

Thanks. I'd probably need something that can be mounted on the dashboard though. Don't think I have room to install that large of a screen/device.

 

 

I guess a probem with non-Apple devices is you don't know whether you'll receive OS updates.

 

 

-It looks like (at least for most of those) you still have to connect your phone to the device.

[rkbabang]

Thanks. I'd probably need something that can be mounted on the dashboard though. Don't think I have room to install that large of a screen/device.

 

You'd have to put in the year/make/model of your car and it will show you what fits.  They have non-carplay receivers that do bluetooth and iPhone/iPod audio control, select "filters".  I think carplay requires the large screen for apps and whatnot.

 

 

[rpadebet]

Does anyone know the reason behind Apple issuing debt overseas? Does this mean, apple can bring the money raised overseas (in the form of debt) home and use it for shareholder returns without paying taxes on it?

 

Apple issues all of its debt in the US. Though some of it is raised by foreign banks (Mitsubishi, CS, etc) in foreign currencies (JPY, EUR, GBP, CHF), it is issued at the US corporate level. All cash raised can be used for buybacks/dividends with the interest being tax-deductible at the US tax rate.

 

What if when the update the tax code, they start taxing stock buy backs as well? In the current tax code buybacks have a preference over dividends as dividends are taxed at the shareholder level when paid and taxes on buybacks are paid only by selling shareholders. All shareholders pay dividend tax.

 

They could easily say stock buy backs are also taxed but at corporation level and give all the shareholders (not just the selling shareholders) a tax credit to offset against the taxes they would owe in proportion of the shares held. Essentially removing the preference corporations/shareholders have for buybacks over dividends.

 

They could also quite easily limit the interest paid tax deduction through AMT or some other manner.

 

They have done such things for individuals, I don't see why they cant do this for corporations. It will be a more easier sale to the corporations are evil and not a "person" crowd.

[johnny]

Buybacks are so important to so many different managements that any policy that tried to remove the tax-advantages of buybacks would be snuffed out early and hard through lobbying. That sort of plank would be axed from a bill before we even knew the bills name.