Microsoft ($MSFT) continues to trade under US$20 a share.  We have previously looked at $MSFT and felt it was undervalued in the US$20-25 range.  We decided it was time to revisit our valuation.

Valuecruncher valuation model of $MSFT with interactive assumptions

Valuecruncher produces a valuation of US$25.34 for $MSFT. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 33.6% above the current share price of US$18.96.

Assumptions

• Revenue: Reuters aggregates 30 analysts covering $MSFT and the mean estimate of 2009 revenues is US$67.3 billion. For our analysis we have used US$64.0 billion in 2009, US$68.5 billion in 2010 and US$72.5 billion in 2011.  Between 2004 and 2008 $MSFT grew revenues at a compound annual growth rate of 13.2% - revenues of US$36.8 billion in 2004 to US$60.4 billion in 2008.
• Profitability: We have used an EBITDA margin of 40.0% to 2011. Reuters has $MSFT‘s EBITD margin at 39.25% last year and an average of 37.0% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$3.75 billion per annum moving forward.
• Discount Rate: 11.0%.
• Terminal Growth Rate: 3.0%. In our assumptions we have 2010/11 revenue growth at 5.8% - we have assumed that growth eventually slows to a 3.0% long-term stable growth rate.  We have used 3.0% as our terminal growth rate.

Our analysis incorporates the cash on the $MSFT balance sheet – Valuecruncher calculates a net debt number.

Comparator Analysis

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. For $MSFT we looked at four peer companies - IBM ($IBM), Apple ($AAPL), HP ($HPQ) and Google ($GOOG). We calculated enterprise values - market capitalisation plus net debt (long-term borrowings less cash). Then we measured a range of metrics against the enterprise value for $MSFT and the peer set.

We have used the last financial year (LFY) as the base set of metrics. $MSFT is currently priced at the bottom of the peer group for the EV/EBITDA and EV/EBIT metrics and in the middle for the EV/FCF metric.  The market is currently valuing the profits (EBIT and EBITDA) and free cash flow produced by $MSFT at less than half that of the comparable numbers for $GOOG. This reflects the perceived different future growth prospects of the two businesses.  The comparator numbers show $MSFT is comparably priced against the peer group - even with the strengths of their business model (39.8% EBITDA margins vs 18.9% for $IBM and 11.7% for $HPQ).  $MSFT’s growth is slowing - but it is still a very good business.  Should $MSFT’s profits (at the EBITDA and EBIT levels) really be valued less than $IBM and $HPQ?

Play with our assumptions – what does your analysis say? We think that $MSFT looks undervalued.  Our model is interactive - you can change any of our assumptions.

Disclosure: None

At Valuecruncher we have looked at Apple ($AAPL) twice over the last six-months. In June with the $AAPL share price at US$186.10 we produced a valuation of US$146.70. Then in September with the $AAPL share price at US$131.05 we had a valuation of US$163.98. We are now in early-December and $AAPL has continued to head south - with the market generally. $AAPL is now trading at US$94.00 - just over half the price we first looked at in June. We felt it was time to revisit the valuation of $AAPL from an intrinsic value perspective - and most importantly the assumptions that we are using. We have also completed some high-level comparator analysis looking at the current price of $AAPL against some broad peers using a range of metrics.

Valuecruncher valuation model of $AAPL with interactive assumptions

Valuecruncher produces a valuation of US$109.55 for $AAPL. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 16.5% above the current share price of US$94.00.

Assumptions

• Revenue: Reuters aggregates 29 analysts covering $AAPL and the mean estimate of 2009 revenues is US$40.6 billion. For our analysis we have used US$36.5 billion in 2009, US$43.5 billion in 2010 and US$49.0 billion in 2011.
• Profitability: We have used an EBITDA margin of 19.0% to 2011. Reuters has $AAPL‘s EBITD margin at 20.8% last year and an average of 16.8% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$1.15 billion per annum moving forward.
• Discount Rate: 11.0%. In our June valuation we used a discount rate of 11.0% but dropped that to 10.0% in September. We believe 11.0% is a reasonable assumption in the current market conditions.
• Terminal Growth Rate: 4.0%. In our assumptions we have 2010/11 revenue growth at 12.6% - we have assumed that growth eventually slows to a 3.0% long-term stable growth rate.

Our analysis incorporates the cash on the $AAPL balance sheet – Valuecruncher calculates a net debt number.

Comparator Analysis

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. At Valuecruncher we have previously looked at comparator analysis.  For $AAPL we looked at a range of broad peers.  We calculated enterprise values - market capitalisation plus net debt (long-term borrowings less cash).  Then we measured a range of metrics against the enterprise value for $AAPL and the peer set.

We have used the last financial year (LFY) as the base set of metrics.  Of the peer group $EBAY and $YHOO had rough LFY performance.  The other numbers are interesting.  The one that stands out a mile to us however is that $AAPL is currently trading at 7.0x last years free cash flow (FCF).  Remove the cash and you can have the business for 7.0x last years FCF - no growth assumed.  Wow - that looks cheap.

Using our valuation of US$109.55 that gives a EV/FCF multiple of 8.7x.  That is still pretty resonable compared to the peer set.

Play with our assumptions – what does your analysis say?

Disclosure: None

It has been a week of financial market turmoil. The Dow is closed at 8,451 on Friday – over 40% below the 52-week high of 14,279 and down 18% for last week alone. There are a lot of very smart people concerned that the markets and broader global economy are headed for a long-term slump. Within this turmoil there is a lot of discussion about valuation. Here at Valuecruncher we wanted to explain our take on valuation and the analysis we provide.

Here at Valuecruncher we believe that in the long-run markets are broadly efficient – market prices properly reflect the intrinsic value of assets. By intrinsic value we mean a ‘true’ underlying value. However, in the short-term there can be and are inefficiencies. At Valuecruncher, valuation is an attempt to estimate what this intrinsic value is and how it relates to current market prices. At Valuecruncher we do that by calculating a discounted cash flow (DCF) valuation. As we noted, in the longer-term we believe that markets will price assets at this intrinsic value. In the shorter term market prices may differ (either up or down). Our approach is a longer term approach. If someone is looking for a valuation of where a stock will be this week – a DCF isn’t the way to go. However, if you want to understand the underlying value of a stock relative the market price and have a longer-term view – that is where a DCF adds value.

For example: Apple ($AAPL). On 4 June 2008 with the $AAPL share price at US$186.10 our estimate of the $AAPL intrinsic value was US$146.70. By 23 September 2008 with the $AAPL share price at US$131.05 our estimate of the $AAPL intrinsic value was US$163.98. $AAPL closed on Friday at US$96.80. In just over four months the market price of $AAPL has dropped 48% – dramatic times indeed. Our estimate of intrinsic value has changed based on changing assumptions of the underlying business. But what we are trying to estimate is the intrinsic value – and we have argued it is both below and above the prevailing share price of $AAPL over the last four months.

At Valuecruncher we will continue to put out our take on the intrinsic value of companies like $AAPL and how this relates to the current share price. Our on-line interactive valuation models allow anyone to change our assumptions and calculate their own intrinsic value. In our own analysis we are going to try and avoid rhetoric like “buy”, “sell”, “cheap” and “expensive”. Ours is a longer-term analysis. We still believe that in the long-run that market prices and intrinsic value will eventually converge.

Understanding intrinsic value helps us to understand corporate transactions like share buy-backs. It can illuminate mergers and acquisitions activity. It can even expose opportunities to invest (and dispose) of stocks.

After a wild week we expect there are still some brave souls out there trying at assess value.

The on-going turmoil in the markets and analysts lowering estimates across the technology sector has had a big impact on Apple’s (AAPL) share price.  AAPL finished at US$131.05 on the 22 September 2008 – 35% below the 52 week high of US$202.96.  We decided to look at the underlying numbers for AAPL using the Valuecruncher on-line valuation model to see where we place the current share price.

Valuecruncher valuation model of AAPL with interactive assumptions

Valuecruncher produces a valuation of US$163.98 for AAPL.  This is a current valuation not a target price.  This valuation is 25% above the current share price of US$131.05 (note our model picks up an earlier price of US$140.91 because we completed the valuation earlier).

Assumptions

Our assumptions are revenues of US$32.5 billion in 2008 growing to US$50.0 billion in 2010. We have used an EBITDA margin of 20.5% in 2008 dropping to 19.5% in 2010. We used a terminal growth rate of 5.75%. We used a terminal capital expenditure number of US$1.25 billion. We have used a WACC (discount rate) of 10.0%.  All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.

Our analysis incorporates the cash on the Apple balance sheet – Valuecruncher calculates a net debt number.

Based on our analysis the current share price looks cheap.  Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

With the release of Apple’s (AAPL) latest quarterly results the share price headed to the US$150 a share range in after-hours trading. Valuecruncher did a valuation for Apple in early June that put a base case valuation on AAPL of US$146.70 – 21% below the then share price of US$186.10. With AAPL moving into the range of our previous valuation – we decided to review our valuation using the Valuecruncher on-line valuation tool.

Apple (AAPL) Valuation Assumptions

Our assumptions are revenues of US$32.8 billion in 2008 growing to US$50.0 billion in 2010. We have used a flat EBITDA margin of 21% from 2008. We used a terminal growth rate of 5.75%. We used a terminal capital expenditure number of US$1.0 billion. We have used a WACC (discount rate) of 11.0%.

Valuecruncher valuation model of Apple (AAPL) with interactive assumptions

Our valuation comes out at US$149.75 per share. This is in-line with the current share price.

Our analysis incorporates the cash on the Apple balance sheet – Valuecruncher calculates a net debt number.

Apple is a great company with incredibly innovative products that consumers all around the world want desperately. That is a position that must be envied by all their competitors in the technology space and beyond.

Warren Buffett’s famous quote is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. At around US$150 a share – in our view Apple fits that criteria. Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.