We have updated the dataset of companies we cover at Valuecruncher.
This is a well overdue process we know.
The dataset is now up to date.
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uncher.com
2011 has been an eventful year for Apple, to say the least.
Perhaps the most significant occurrence of the year, and certainly the unhappiest, was the October 5th passing of Apple’s co-founder and visionary Steve Jobs. Jobs cr
eated
a company, and led it, through turbulent some turbulent times to become today one of the world’s most distinguishable brands, whose design-focused products have developed a cult-like following. Jobs’ legacy lives on, and the company continues to astound.
It was perhaps a tribute to Steve that, before his passing, he witnessed in early August Apple pip oil group ExxonMobil to become (for a while) the world’s largest company by market value, at the time reaching a market capitalisation of US$337 billion. While this was due in part to Exxon’s poor fortune amid turbulent times on the stock market and depressed oil prices, having announced its best quarterly performance ever helped Apple’s share price to hit US$365.25, causing its market capitalisation to temporarily leapfrog that of Exxon.
In the week of the 17 October 2011 Apple’s share price hit US$426.70. Today that price is US$366.99, implying a market cap of US$341.08 billion. What is driving investors to value the technology company so highly?
Firstly, let’s look at the consensus estimates for Apple’s revenues and profit levels.
Analysts predict revenues to continue to grow strongly, but at a slower rate than the previous five years, achieving a compound annual growth rate (CAGR) over the next five years of 8.9%. Profit (as measured by EBITDA) grows as well, at a five year CAGR of 9.8%. The implied profitability levels are forecast to stay relatively constant around 33%.
How do these forecasts compare to Apple’s historical performance?
The first observation is that revenue grows 52% from 2009 to 2010, and a massive 66% from 2010 to 2011, with the growth rate falling in the forecast period. Second, profitability has grown from 19.2% to 32.9% in the five years to 2011, and is forecast to stay relatively constant over the forecast period.
These are impressive growth rates. But do they justify the current share price?
Discounted Cash Flow (DCF) Valuation
First, we carried out a DCF valuation based on consensus estimates for future revenue and profitability, CAPEX and depreciation, and Valuecruncher estimates for parameters including the discount rate and the long term growth rate.
Using a DCF valuation, we value the share price of Apple at US$323.76 – 11.8% lower than the November 23 closing price of US$366.99. For this valuation we used a discount rate of 11.5% and a long term growth rate of 2.5%.
To get to a valuation of US$366.99, assuming the consensus estimates and estimated discount rate are accurate, implies a necessary long term growth rate of 4.6%. This means investors buying in at US$366.99 expect revenues to grow at least 4.6% per annum forever (while maintaining the current profitability ratios) to justify the price.
Note: The value of equity is calculated as enterprise value less net debt. Equity value is then divided by the total number of shares to get a price per share. In our valuation, we used cash and equivalents plus short term investments plus long term investments to calculate net debt. Apple has zero debt and a total of US$81.74 billion of cash and equivalents, short term investments and long term investments. Thus, because net debt is negative, Apple’s equity value is US$81.74 billion greater than its enterprise value.
It is obvious then that the treatment of cash in the net debt calculation directly affects the share price. If we were to use only cash and equivalents and short term investments to calculate net debt, the share price falls to US$263.92. If we reduce the cash calculation further by only including cash and short term equivalents, the share price drops again to US$246.38.
Comparison Analysis
We then completed a comparison analysis, looking at how the market was valuing a range of Apple’s peer companies. The companies used in the comparison were:
Using the Valuecruncher interactive analysis report, these comparators can be substituted for others as you wish. Other potential comparators include:
The metric of choice for this valuation was EV/EBITDA, that is, the enterprise value of the company divided by its EBITDA. This metric essentially allows us to compare how investors value one dollar of Apple’s earnings relative to its competitors – a high metric shows that investors value one dollar of a company’s earnings more highly than one dollar of a company’s earnings that has a low a metric.
To complete the comparison analysis, the average EBITDA multiple from the four peer companies is calculated and then applied to Apple’s EBITDA, to give an implied enterprise value for Apple based on how similar companies are being valued. Net debt is then subtracted from the enterprise value to give the value of equity in the business, which is then divided by the number of shares to give a share price.
The market cap weighted average EV/EBITDA multiple for the chosen peer group was 9.06x. Applying this to Apple’s EBITDA from the last financial year of US$35.582 billion implies an enterprise value of US$322.37 billion. The negative net debt means that to calculate the value of equity, Apple’s cash and total investments balance of US$81.74 billion is added to the enterprise value, to give an equity value of US$404.11 billion, and a resulting share price of US$434.81.
Thus, based on how the market is valuing Apple’s peers, Apple appears to be undervalued by 15.6%.
Summary
The two valuation methodologies shown above elicit very different results. We place more weighting on the DCF analysis, which looks at the fundamental aspects of the business, rather than how the market is currently valuing Apple’s peer group.
The difference in the valuation produced by the two methodologies used above suggests there is a disconnect between the fundamental analysis (DCF) and how the market is currently valuing Apple and its peers.
Results of the market analysis suggest Apple is undervalued by 15.6%. In other words, the market currently values one dollar of Apple’s earnings lower than one dollar of their competitors (included in the comparison analysis).
Thus, we suggest that the market is currently overvaluing the technology industry (as represented by the companies included in this analysis), but undervaluing Apple, relative to its peers.
Note: Andrew Smith is an analyst at investment bank Woodward Partners
Woodward Research, a new New Zealand equity research firm, has written a report on the Trade Me IPO occuring on the NZX.
A copy of the report is available free on the Woodward Research site.
Disclosure: Valuecruncher CEO Mark Clare is associated with Woodward Research.
Wow – a blog post. It has been a while. Most of the action is happening over on Twitter:
With the LinkedIn ($LNKD) IPO occurring today – I wanted to give some thoughts. Here
they are:
LinkedIn ($LNKD) IPOed today closing at $94.25 for a market capitalisation of $8.9bn – at 31 December 2010 $LNKD had $92m of cash and no debt – so we will give $LNKD an Enterprise Value (EV) of $9.0bn.
Big result. On SecondMarket (private secondary market) LinkedIn shares had traded at $35 a share in March 2011. The IPO was priced at $45 a share. End of first day $94 a share. The IPO bankers – Morgan Stanley, Merrill Lynch and Allen & Company – may have some questions to answer about pricing. A lot of interest – a good IPO for the technology/internet sectors.
How about some ratios? We are going to focus on EV/Revenue – how is the market valuing a company as a ratio of revenues. Because we are talking about growth companies – we are going to use estimates of 2011 revenues. So EV/Revenue (Forecast 2011).
LinkedIn ($LNKD) had revenues of $78m in 2008, $120m in 2009 and $243m in 2010. The company says growth will slow this year. We have estimated 2011 revenues at $400m – our number.
LinkedIn ($LNKD) EV/Revenue [Fcst 2011] is therefore 22.5x
How about some context
Apple ($AAPL) EV – $285.6bn, 2011 forecast revenues – $103.0bn: EV/Revenue [Fcst 2011] 2.8x
Google ($GOOG) EV – $137.7bn, 2011 forecast revenues – $28.3bn: EV/Revenue [Fcst 2011] 4.9x
Facebook ($FBOOK) – a bit more detail. Market Cap – $75bn on SecondMarket and $85bn on SharesPost (we will use the lower). We will assume zero net debt (long-term borrowings less cash). Gives an EV of $75bn. A reliable estimate of Facebook ($FBOOK) revenues for 2011 is $4.05bn. EV/Revenue [Fcst 2011] 18.5x
LinkedIn ($LNKD) does look expensive. But a lot depends on the future growth prospects – as it does with all company valuations. How fast can LinkedIn grow paying subscribers? As a sample size of one – I love the LinkedIn service (freemium business model) but I get all the functionality that I need from the free offering.
It will be really interesting for Facebook ($FBOOK) investors to watch the LinkedIn IPO. I imagine that a number will now be pushing for an IPO for Facebook – with the success of the LinkedIn IPO. The gap in value between the SecondMarket trades for LinkedIn and and the IPO outcomes will have current investors salivating. From a market efficiency point of view – it will be interesting to see what happens to the next set of trades for Facebook on SecondMarket and SharesPost. Even if there is simply a lift in the Facebook multiples – our analysis of high-level EV/Revenue [Fcst 2011] for LinkedIn is 22.5x which equates, if applied to Facebook, a valuation over $90bn.
Interesting times…
Here are the company of the day Tweets from the last few weeks:
Expedia ($EXPE) http://bit.ly/ez61
Mw
| Thinking travel – but $EXPE looks expensive vs peers.
Airgas ($ARG) http://bit.ly/eSExJh | The Air Products ($APD) offer at $70/share rejected – concur $88.43 is our number.
NIKE ($NKE) http://bit.ly/MY4m | looking cheap against peers – $CROX is an outlier.
Visa ($V) http://bit.ly/fkSnK5 | Looking cheap vs peers – and maybe just because mine is taking a hammering…
The Home Depot ($HD) http://bit.ly/H6vTP | Looking expensive compared to peers.
ConocoPhillips ($COP) http://bit.ly/gBExti | Trading broadly in-line with peers.
McDonald’s Corp ($MCD) http://bit.ly/Ggcu | Trading in line with peers – but facing more “Happy Meal” litigation.
Emergency Medical Services ($EMS) http://bit.ly/hklKKv | Looks v.cheap – and reviewing strategic alternatives. Up 17%.
Dionex ($DNEX) http://bit.ly/i7YXLd | Thermo Fisher Scientific ($TMO) acquires $DNEX for $2.1B. Good deal for $DNEX shs
Occidental Petroleum ($OXY) http://bit.ly/hG7Q4u | Looking cheap against peers – and adding to US oil properties.
salesforce.com ($CRM) http://bit.ly/eBW8dK | A large acquisition – but what is a steady-state SaaS business?
Nicor ($GAS) http://bit.ly/g7WWkl | Being acquired by AGL Resources ($AGL). $GAS looked cheap vs peers.
Borders ($BGP) http://bit.ly/phZF6 | $BGP largest shareholder says they will finance a bid for $BKS. $BGP looks cheap.
PepsiCo ($PEP) http://bit.ly/6e1Gq | Looking cheap against $KO.
The Procter & Gamble Company ($PG) http://bit.ly/HJgPm | Looking cheap against the peer group.
CPI International ($CPII) – http://bit.ly/hRfO2Y | Being acquired by Veritas Capital – but still looking cheap.
Del Monte Foods ($DLM) http://bit.ly/etaCX3 | Being acquired by private equity group led by KKR. Still looks cheap.
The Coca-Cola Company ($KO) http://bit.ly/SKKoI | Looking expensive against the peer group (especially $PEP).
J. Crew ($JCG) http://bit.ly/id8rK4 | Up 16% after the company announced it would be purchased by private equity buyers
Novell ($NOVL) http://bit.ly/hbmU18 | Acquired by PE backed-co. $VMW skews the peer group – but $MSFT gets no respect.
Southwest Airlines ($LUV) http://bit.ly/85Gl9 | Trading close to the peer group. $LUV is 40 years old next year…
Dell ($DELL) http://bit.ly/PiUCG | Looks cheap against peers and Q3 earnings significantly above forecasts.
Goldman Sachs ($GS) http://bit.ly/dbtREP | Closer to peer group that I expected ($MS an outlier). And 110 new partners.
Wal-Mart ($WMT) http://bit.ly/SgjuJ | Looking fairly valued after a mixed Q3 result.
Bucyrus ($BUCY) http://bit.ly/cW35v7 | $CAT offering $92 a share – but still looks cheap.
Viacom ($VIA.B) http://bit.ly/98ILtx | Looking expensive against the peer group ($DIS, $TWX, etc).
Cisco ($CSCO) http://bit.ly/v7DAv | Hammered after the result yesterday (down 16%). Remove $NZ in doing comps analysis.
Chevron ($CVX) http://bit.ly/alcvHR | Undervalued against a peer set ($BP is an outlier). Buying Atlas for more gas.
Eli Lilly & Co ($LLY) http://bit.ly/a2JMoS | Looking cheap against peers – and on the acquisition trail…
Starbucks ($SBUX) http://bit.ly/c0OcT | Solid result last week – trading in-line with peer group ($MCD, $YUM, etc).
Orbitz Worldwide ($OWW) http://bit.ly/9LXRH4 | Looking cheap against peers – but being hammered by AA ticket threat.
Time Warner ($TWX) http://bit.ly/8qVAlM | Looking cheap against peers like $DIS and $VIA.B
BP ($BP – FSE) http://bit.ly/aIIvZm | Look at that valuation vs peers. Evil – probably. Cheap – also probably…
Texas Instruments ($TXN) http://bit.ly/bHdL1U | Good result (profit up 60%) – and postitive results from $INTC and $AMD
Caterpillar ($CAT) http://bit.ly/qdsqd | Looking expensive against peers – but making cash acqs (MWM for $810m from 3i)
Amazon ($AMZN) http://bit.ly/14xSkH | A good Q3 result – and a company we really like. But it looks expensive still.
eBay ($EBAY) http://bit.ly/15cyQM | Strong earnings result – we see the comapny well undervalued.
IBM ($IBM) – http://bit.ly/4yhQH | We have the company fairly valued against peers – Q3 result just out (down 4% a/hrs).
Yahoo ($YHOO) http://bit.ly/T2tJN | Acquisition rumours flying around – $AOL / private equity…
If you want to follow us on Twitter we can be found @Valuecruncher
Here are the NZX (New Zealand Stock Exchange) company of the day Tweets from the last week:
PGG Wrightson ($PGW.NZ) http://bit.ly/aoEjKC | Partial takeover by Chines
e cos at $0.60 – which is above our value.
New Zealand Refining Company ($NZR.NZ) http://bit.ly/2kxrE | Near 52-week high – but looking expensive vs peers.
Briscoe Group ($BGR.NZ) http://bit.ly/d2TXkr | Trading near a 52-week high – but still looks cheap vs peers.
Comvita ($CVT.NZ) http://bit.ly/cthk8r | looking cheap vs peers – but an IP dispute loss http://bit.ly/foBZ7n
Michael Hill ($MHI.NZ) http://bit.ly/aRF12 | Founding interests trying to acq control stake @ NZ$0.90 (NZ$0.85 Fri)
Fisher & Paykel Appliances ($FPA.NZ) http://bit.ly/NINfN | dramatically cutting earnings guidance dated only 26 Nov
NZX ($NZX.NZ) http://bit.ly/H441n | NZ fin mkt operator looks expensive vs peers + ASX/SGX merger moves fwd a step
Delegat’s ($DGL.NZ) http://bit.ly/gLlXE7 | takeover of grape grower Oyster Bay now unconditional.
Air NZ ($AIR.NZ) http://bit.ly/7wmKK | Looking cheap against peers – and with Virgin Blue alliance decision due.
New Zealand Oil & Gas ($NZO.NZ) http://bit.ly/aUCJ3V | Looking cheap vs peers – but impact of $PRC.NZ still unclear
If you want to follow us on Twitter we can be found @Valuecruncher
Here are the NZX (New Zealand Stock Exchange) company of the day Tweets from the last week:
Xero ($XRO.NZ) http://bit.ly/1apqdA | Announces $4m investment by PayPal co-founder and Facebook investor Peter Thiel
Skellerup Holdings ($SKL.NZ) http://bit.ly/CICAG | Developer of technical polymer products.
Air New Zealand ($AIR.NZ) http://bit.ly/7wmKK | Looking cheap with $AIR.NZ and $VBH.AX are working hard on alliance
Diligent Board Member Services ($DIL.NZ) http://bit.ly/9QuEfY | Looking expensive – and currently in a trading halt
Cavalier Corporation ($CAV.NZ) http://bit.ly/P6VeX | Carpet and wool player looks cheap against peer group.
Scott Technology ($SCT.NZ) http://bit.ly/bWPQb0 | Automated and robotic machinery maker posted earnings of NZ$2.8m
Lyttelton Port Company Limited ($LPC.NZ) http://bit.ly/cuWH5q | Cheap – but dealing with major post-quake issues.
Comvita ($CVT.NZ) http://bit.ly/cthk8r | The medical honey products company announces Investment by Asian partners
If you want to follow us on Twitter we can be found @Valuecruncher
Here are the company of the day Tweets from the last week:
pha.com/symbol/ibm”>IBM) – http://bit.ly/4yhQH | We have the company fairly valued against peers – Q3 result just out (down 4% a/hrs).
Google ($GOOG) http://bit.ly/8FxDs | Great results have pushed the share price up (nearly 9%) in after hours trades.
Yahoo ($YHOO) http://bit.ly/T2tJN | Acquisition rumours flying around – $AOL / private equity…
Adobe ($ADBE) http://bit.ly/9n8cLh | Still looking cheap – even with the $MSFT rumours circulating.
The Washington Post Company ($WPO) http://bit.ly/pQgWH | We say undervalued against peers – is $1 for Newsweek cheap?
Verizon Communications ($VZ) http://bit.ly/1lxPBq | We think it looks cheap – and now getting the iPhone (early-2011)
GSI Commerce ($GSIC) http://bit.ly/ayRvTk | Looks expensive – but like the new e-commerce loyalty scheme concept
If you want to follow us on Twitter we can be found @Valuecruncher
Here are the NZX (New Zealand Stock Exchange) company of the day Tweets from the last week:
Rakon ($RAK.NZ) buy viagra
w” href=”http://bit.ly/xCUFz” target=”_blank”>http://bit.ly/xCUFz | Just announced record UK sales – but looks expensive at current prices.
Methven ($MVN.NZ) http://bit.ly/H6hV | Looking cheap – but recently fined for misleading advertising.
Michael Hill International ($MHI.NZ) http://bit.ly/aRF12 | Retail jewellery business – 323 stores around the world.
PGG Wrightson ($PGW.NZ) http://bit.ly/aoEjKC | Not looking to be part of a wool co-op http://bit.ly/aZJRlz – smart.
SKY Network Television ($SKT.NZ) http://bit.ly/9hDFRj | Teaming with NZ telcos to deliver TV on the net
If you want to follow us on Twitter we can be found @Valuecruncher
Here are the company of the day Tweets from the last week:
Genzyme ($GENZ) http://bit.ly/bkIOWy | we see sligh
tly overvalued – Sanofi-Aventis hostile bid looks pretty fair
Motorola ($MOT) http://bit.ly/d2IdGU | We think it looks expensive – and is being sued by $MSFT over Android
Dollar Thrifty Automotive ($DTG) http://bit.ly/datLR7 | About to vote on $HTZ offer. Still cheap against $HTZ.
Barnes & Noble ($BKS) http://bit.ly/agxeSK | Looks very cheap – now heading into a sale process
Walgreen ($WAG) http://bit.ly/9qmWJt | Up 10% today on profit announcement – we still see upside.
AirTran ($AAI) | Acq by $LUV for $1.37bn. These multiples are yesterday http://bit.ly/b0apLB.
Southwest Airlines ($LUV) http://bit.ly/cB1YPi | Trading at a multiple below both $DAL and $CAL
The Krogers Co ($KR) http://bit.ly/bbc3IP | CEO sold $3.2m of shares this week – but we think $KR looks cheap. Hmmm
If you want to follow us on Twitter we can be found @Valuecruncher
