Current Analyst Estimates - Discounted Cash Flow Valuation

  • Posted: 17 September 2010 10:41 AM

    Hi everyone,

    This is my first post on this forum, I just wanted to share with people here a valuation using simply the current average analyst estimates.  I have included the assumptions and variables used in the model below..  I have used a required return on equity discount rate used by S&P (as it is a higher cost of equity than Trefis, to arrive at a more conservative estimate), and the mean terminal growth rate from Trefis and S&P.  I have also discounted the present value figures by a 1-year Market Efficiency discount rate which is derived from the calculations used by S&P.  The Risk-Free rate provided to estimate returns on cash and equivalents is the standard current rate to calculate option prices.

    The only purpose of this valuation is to arrive at a benchmark price for AAPL which the stock should trade at if investors accepted analyst forecasts as inevitable.  Therefore I have included a predicted price for September 2011 (+1 Month, as it will apply post-results), to gauge what the price should be if these estimates prove to be correct.  The valuation serves no other purpose, therefore I don’t believe it overlaps with other research on this board, which I have found very useful.

    The data and results are as follows:

    Data:

    Valuation Date - AAPL - 15,09,2010
    Valuation Delay - 1 Month
    Number of Shares - 927,361,000
    Risk-Free Rate - 1.00%
    Required Return on Equity - 12.00%
    Sept 2010, 1 Year EPS Growth - 21.56%
    Sept 2011 + 4 Year Average EPS Growth - 18.58%
    Sept 2010 + 5 Year Average Annual EPS Growth - 19.17%
    Sept 2010 + 5 Year Total EPS Growth - 140.34%
    Terminal EPS Growth Rate - 3.00%
    Terminal Net Discount Rate - 9.00%
    June 2010 Quarterly Net Income - $3,253,000,000
    Current Assets (Cash & Equivalents) - $46,000,000,000
    Total Debt - $0
    Net Cash - $46,000,000,000
    Net Cash per Share - $49.60
    June 2010 Quarterly EPS - $3.51
    Sept 2010 Quarterly EPS Estimate - $3.97
    Dec 2010 Quarterly EPS Estimate - $4.90
    Average Jan-Sept (3). Quarterly EPS Estimate - $4.22
    Jan-Sept 2011, 3 Quarters EPS Estimate - $12.65
    Sept 2010, 1 Year EPS Estimate - $14.44
    Sept 2011, 1 Year EPS Estimate - $17.55
    Sept 2012, 1 Year EPS Estimate - $20.81
    Sept 2013, 1 Year EPS Estimate - $24.68
    Sept 2014, 1 Year EPS Estimate - $29.26
    Sept 2015, 1 Year EPS Estimate - $34.70
    Sept 2016, 1 Year EPS Estimate - $35.74
    Sept 2017, 1 Year EPS Estimate - $36.81
    1-Year Market Efficiency - 95.59%

    Present Value Calculations:

    Present Value (Sept 2010) Valuation - $347.04
    Sept 2010 Net Cash Valuation - $49.60
    Sept 2010 to Sept 2011 Earnings Valuation - $15.67
    Sept 2011 to Sept 2012 Earnings Valuation - $16.59
    Sept 2012 to Sept 2013 Earnings Valuation - $17.57
    Sept 2013 to Sept 2014 Earnings Valuation - $18.60
    Sept 2014 to Sept 2015 Earnings Valuation - $19.69
    Sept 2015 to Sept 2016 Earnings Valuation - $18.11
    Sept 2016 Onwards Earnings Valuation - $207.23


    Present Value (Sept 2011) Valuation - $366.69
    Sept 2011 Net Cash Valuation - $50.10
    Sept 2011 to Sept 2012 Earnings Valuation - $18.58
    Sept 2012 to Sept 2013 Earnings Valuation - $19.67
    Sept 2013 to Sept 2014 Earnings Valuation - $20.83
    Sept 2014 to Sept 2015 Earnings Valuation - $22.05
    Sept 2015 to Sept 2016 Earnings Valuation - $20.28
    Sept 2016 Onwards Earnings Valuation - $232.10


    The data yields a value of $366.69 for September 2011 (plus allowing for a month for results reporting), and a September 2010 value of $347.04 (purely as a reference point, as investors need analyst estimates met by results before meeting the reference price).

    Edit: For completeness, a major assumption in this model is that Earnings (Net Income) and Free Cash Flow merge in the Long-Run Time Horizon.

    [ Edited: 18 September 2010 07:20 PM by DawnTreader ]      
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    Posted: 17 September 2010 06:11 PM #1

    turonm - 17 September 2010 01:41 PM

    Hi everyone,

    This is my first post on this forum, I just wanted to share with people here a valuation using simply the current average analyst estimates. 
    ...

    Welcome, and thanks for sharing. Valuation remains somewhat of a mystery to me (though I’ve done one on AAPL as an exercise back in the spring) and I rely on this board’s research heavily in setting expectations for price ranges. Of course, all models are subject to the market’s whims.

         
  • Posted: 17 September 2010 06:18 PM #2

    It’s good to be here! Of course all valuations are subject to both short / long-term macro and micro-economic movements & conditions. The posted present value estimates are only meant as a reference point against the current price, affected by variations derived from market conditions, shocks and investor sentiment. Anyhow, happy investing. I hope to post more within this forum.

    [ Edited: 17 September 2010 06:21 PM by turonm ]      
  • Posted: 17 September 2010 06:28 PM #3

    Welcome to AFB.  It would be interesting to see the numbers you arrive at using the analysts that frequent this board which have a much better history of…,you know…,accuracy.  Deagol, Turley, DT, Andy Zaky et.al.

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  • Posted: 17 September 2010 06:54 PM #4

    That would be great, it would be good to become a part of the community.

         
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    Posted: 17 September 2010 07:02 PM #5

    turonm,

    Thank you for posting detailed computation of valuation.  $340-$360 sound right.

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    Posted: 17 September 2010 09:17 PM #6

    Can you recommend a link to educate myself on what you are doing?  Seems interesting.

    Welcome!

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  • Posted: 17 September 2010 10:53 PM #7

    Welcome to AFB and thanks for a thoughtful first post.

         
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    Posted: 17 September 2010 11:41 PM #8

    capablanca - 18 September 2010 01:53 AM

    Welcome to AFB and thanks for a thoughtful first post.

    Salut !

         
  • Posted: 18 September 2010 03:34 AM #9

    calebcar - 18 September 2010 12:17 AM

    Can you recommend a link to educate myself on what you are doing?  Seems interesting.

    Welcome!

    Hi there! Sure, I’m using discounted cash flow analysis, which basically aims to value a stock using the definiton of what a market capitalisation / share price constitutes.  Trefis solely use this method, heere is a useful explanation of their reasons:

    https://www.trefis.com/faq#22

    It’s important to remember as these valuations greatly depend on assumed rates of growth annd calculation of risk, they are somewhat sensitive to these factors.

    In addition, Investopedia would be a good place to start:

    http://www.investopedia.com/university/dcf/

         
  • Posted: 18 September 2010 08:01 AM #10

    Cash Valuation for Sept.11 seems low/wrong.

         
  • Posted: 18 September 2010 08:14 AM #11

    danthemason - 18 September 2010 11:01 AM

    Cash Valuation for Sept.11 seems low/wrong.

    Thanks for that observation, I should have included that the model assumes full free-cash flow re-investment, from the present.  This may seem idealistic, however given the current cash position of AAPL, I believe it is a fair long-run assumption.

         
  • Posted: 18 September 2010 09:35 AM #12

    Aren?t the consensus earnings growth rates too conservative?

    Sept 2010, 1 Year EPS Growth - 21.56%
    Sept 2011 + 4 Year Average EPS Growth - 18.58%
    Sept 2010 + 5 Year Average Annual EPS Growth - 19.17%
    Sept 2010 + 5 Year Total EPS Growth - 140.34%

    For example, they show a one year rate at 21.56%. I believe it will be around 100%, but 70% might be a more realistic target, and 50% would be very, very conservative. The additional years out growth rate projections are therefore wildly off (way too low). Hasn?t Apple been growing their earnings 40- 50% per year (compounded) for the last 5 years? Interestingly, Apple?s earnings growth is actually accelerating due to new products like the iPad. Apple?s forward 3- 5 year growth is almost limitless based on Apple?s 3- 5% WW market share in computers and mobile phones. Arguably, next years Ipad penetration may be less than 2% of the potential market. In other words, about 90% of Apple?s products by sales can continue to grow at 50% YOY compounded for many, many years.

    Due to the powerful effects of compounding values, the resulting valuation projections shown here, based on WS analysts growth projections will be so vastly understated to the point of being meaningless. On the other hand, these projections are useful to illustrate that wildly conservative projections still generate price projections that show Apple as undervalued.

    It would be illuminating if you also generated a valuation analysis based on DT?s growth rates (or any of the other often quoted AFB posters).

    IMO, utilizing published W ST growth rates to generate a valuation for Apple is akin to the adage?  garbage in garbage out.

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  • Posted: 18 September 2010 09:46 AM #13

    jeffi - 18 September 2010 12:35 PM

    On the other hand, these projections are useful to illustrate that wildly conservative projections still generate price projections that show Apple as undervalued.

    It would be illuminating if you also generated a valuation analysis based on DT?s growth rates (or any of the other often quoted AFB posters).

    As I stated in my original post, the valuation serves no other purpose other than to provide a benchmark based on current consensus estimates.  The research on this board is of a separate matter, and is in no way devalued, as I hope I hope my original iteration portrayed.  I purposefully chose not to engage in these variations in this particular thread.  It is your opinion that the inputs are garbage, it may also be my own investment thesis, however I hardly believe the level of discourse devolving to ‘garbage in, garbage out’ is conducive to formulating valuations.

         
  • Posted: 18 September 2010 10:08 AM #14

    turonm - 18 September 2010 12:46 PM
    jeffi - 18 September 2010 12:35 PM

    On the other hand, these projections are useful to illustrate that wildly conservative projections still generate price projections that show Apple as undervalued.

    It would be illuminating if you also generated a valuation analysis based on DT?s growth rates (or any of the other often quoted AFB posters).

    As I stated in my original post, the valuation serves no other purpose other than to provide a benchmark based on current consensus estimates.  The research on this board is of a separate matter, and is in no way devalued, as I hope I hope my original iteration portrayed.  I purposefully chose not to engage in these variations in this particular thread.  It is your opinion that the inputs are garbage, it may also be my own investment thesis, however I hardly believe the level of discourse devolving to ‘garbage in, garbage out’ is conducive to formulating valuations.

    It is clear that most on this board appreciate your participation and work. I concur and apologize if my comments appeared otherwise.

    I do think that Apple’s stock priced is depressed on a valuation basis in part because of misinformation or bad research on WS. Therefore, only showing projections based on shoddy work only perpetuates and extends the damage (garbage in, garbage out).

    Hopefully, someone will illustrate Apple’s discounted cash flow valuation based on projections by those on this board. Having both results will be insightful and balanced.

    You are the messenger. I was not trying to shoot the messenger.

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  • Posted: 18 September 2010 10:26 AM #15

    jeffi - 18 September 2010 01:08 PM
    turonm - 18 September 2010 12:46 PM
    jeffi - 18 September 2010 12:35 PM

    On the other hand, these projections are useful to illustrate that wildly conservative projections still generate price projections that show Apple as undervalued.

    It would be illuminating if you also generated a valuation analysis based on DT?s growth rates (or any of the other often quoted AFB posters).

    As I stated in my original post, the valuation serves no other purpose other than to provide a benchmark based on current consensus estimates.  The research on this board is of a separate matter, and is in no way devalued, as I hope I hope my original iteration portrayed.  I purposefully chose not to engage in these variations in this particular thread.  It is your opinion that the inputs are garbage, it may also be my own investment thesis, however I hardly believe the level of discourse devolving to ‘garbage in, garbage out’ is conducive to formulating valuations.

    It is clear that most on this board appreciate your participation and work. I concur and apologize if my comments appeared otherwise.

    I do think that Apple’s stock priced is depressed on a valuation basis in part because of misinformation or bad research on WS. Therefore, only showing projections based on shoddy work only perpetuates and extends the damage (garbage in, garbage out).

    Hopefully, someone will illustrate Apple’s discounted cash flow valuation based on projections by those on this board. Having both results will be insightful and balanced.

    You are the messenger. I was not trying to shoot the messenger.

    I am very happy to provide such a valuation and will post this in due course.  I respect and value your clarified position, as I’ve stated, you and I may not differ greatly in personal projections for AAPL.