I have analyzed Apple's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.
The analysis evaluates investment suitability by determining whether the company satisfies seven criteria. GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied at all. An Overall Score between zero and 100, which takes the details of all criteria into account, is also computed. While the analysis includes both growth and value criteria, the calculation is weighted to favor companies that exhibit good value characteristics over companies that are fast growers.
An Overall Score of 60 or higher is good result, and it signifies that the subject company appears to have enough value-investment appeal to be worth examining in more detail.
First, a quick review of the company itself.
Apple has become one of the largest companies in the wolrld by selling stylish computers, tablets, smartphones, music players, and watches, as well as software and media. Services for these devices are also a lucrative and growing business for Apple, but selling iPhones is, by far, the company's largest single revenue source. Apple's shares split 4-for-1 on 28 August 2020; they had split 7-for-1 just six years earlier.
Apple recorded profits of $57 billion on revenue of $275 billion during the last year. In the quarter that ended on 26 September 2020, Apple earned $0.73 per share, which beat the $0.71 Wall Street consensus forecast. See tinyurl.com/yx9xv84k for Apple's most recent quarterly report.
Shares of Apple now trade for about $109 each. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.
Analysis Results:
Apple's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments
1. The Company's Size is Substantial: GREEN
Market Value: $1.9 trillion (mega-cap)
2. The Company is Conservatively Financed: RED
Current ratio = 1.4 (>2.0 is conservative)
Long-term debt/Working Capital = 257% (<150% is conservative)
3. The Company Generates Stable Earnings: GREEN
Twenty positive quarterly earnings reports in last 5 years (perfect)
Earnings variability = 1% (negligible)
4. The Company Exhibits Earnings Growth: YELLOW
Owner Earnings growth rate (trailing year) = 8% (modest)
Owner Earnings growth rate (five-year average) = 5% (modest)
Free Cash Flow growth rate (trailing year) = 25% (very good)
Free Cash Flow growth rate (five-year average) = 8% (modest)
5. The Company is Efficiently Profitable: GREEN
Cash Flow Return On Invested Capital = 43% (excellent)
Operating Profit/Sales = 24.1% (excellent)
6. The Company Pays a Healthy Dividend: GREEN
Dividends paid for the last 7 years or longer
Dividend 5-year average growth rate = 10% (good)
Dividend = 19% of last year's FCF (easily sustainable with room to grow)
7. The Company's Shares are Fairly Valued: RED
Price/Owner Earnings (last year) = 30.9 (very expensive)
Price/GAAP Earnings (five-year average) = 40.1 (expensive)
Free Cash Flow/Market Value = 3.9% (low, less than the five-year average of 7.0%)
Acquirer's Multiple = 28.7 (very expensive)
Price/Book Value = 28.8 (more expensive than the five-year average of 9.2)
Price/Sales = 6.8 (more expensive than the five-year average of 3.7)
In summary, the analysis assigned Apple four GREEN, one YELLOW, and two RED grades. The resulting Overall Score is 44 of the 100 possible points, which is unappealing. The score is below the 60-point threshold, and, therefore, Apple does not qualify at this time for consideration by value investors.
Check back here occasionally for updates to the Overall Score, which will typically move up or down each time the company releases new financial results and when the share price changes significantly.
This analysis reported here is not, by any means, a complete evaluation of the subject company, and it does not consider all material facts about the company's operations, finances, or future prospects. The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate. Readers are encouraged to independently verify all data. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk. The analysis is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a position in the subject company and/or its competitors. The methodology and results are subject to change without notification.
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