Apple is among the most misunderstood companies ever. Most people are obsessed about what I would call “short term factors” such as if Apple will beat the estimates this quarter, what the next quarter guidance is going to be and what the next hot story will be. People don’t seem to care about if Apple’s long term story continues to make sense or whether or not Apple is a solid and attractively priced company.
The fact of the matter is that Apple is among the most well-known brands in the world, it scores very high in consumer satisfactory surveys and people in general want to be associated with Apple – that is priceless.
What You have with Apple is the following:
- An impregnable balance sheet. Ben Graham classifies current ratio > 2 as a strong financial position. Most companies that are considered to have a strong financial position often barely meet this criterion. For Apple, current ratio (incl. long-term marketable securities) equals 3,7. Also, the lion share of this is cash and marketable securities. Apple is absurdly over-capitalized.
- A company well-positioned for future growth and that has shown on average 50 percent EPS-growth a year for the last seven years.
- An incredibly strong cash flow that on average is 10-20 percent stronger than reported earnings.
- A dividend yield around 2,4 percent (based on share price $500). I think Apple will increase the dividend by roughly 15 percent in April (Q2), pushing the yield to 2,8 percent.
- The biggest buy back in corporate history. People went nuts about the Google $3,2B acquisition of Nest. That Apple spent $22,86B in 2013 alone buying back Apple stock is, on the other hand, treated as a non-story. Those huge buy-backs (and I expect them to be increased in April) will greatly benefit Apple shareholders in the long run.
- A company that is astonishingly discounted in the market with returns on equity being among the best in the overall market. Apple is trading at roughly P/OE (excl. cash and marketable securities) 7,2. To any reasonable estimate of value, that is very cheap – You get a big margin of safety. Relative to its high quality, I would say this is the cheapest company in the market.
Apple is disguised as a very risky niche tech company (look at Nokia, RIM...) while it actually is more of a solid consumer electronic company. Apple is treated by the market as kind of a long-shot turnaround case. But Apple is actually not a turnaround case. Apple is in fact doing well right now, and considerably better than the competition, in all important product categories (iPhone, iPad and iTunes/Software/Services). It is also well-positioned for future growth in the emerging markets.
So, if You actually care about intrinsic value and valuation, what is not to like?