Apple’s P/E Multiple With And Without Cash In The Valuation

  • Posted: 13 February 2011 03:08 PM #16

    Sparky - 13 February 2011 07:04 PM
    DawnTreader - 02 February 2011 06:00 AM

    A quick comparison of Apple’s p/e multiples with and without cash on dates that followed the release of quarterly earnings reports.

    Snippet: No matter the 77% rise in the share price between February 1, 2010 and today, the share price appreciation has essentially only kept pace with the 75% gain in 12-month trailing earnings per share. The sans cash share price has risen 85% since February 1, 2010 yet the cash adjusted p/e multiple remains well within the recent historical range. At today’s closing price of $345.03, AAPL remains moderately priced based on a comparison of the five quarterly dates selected. The shares are positioned for at least modest appreciation over the next few weeks and prior to the expected run-up of the share price in anticipation of March quarter results.

    Apple is building cash while increasing profits. I don’t see a high risk of p/e compression over the next year.

    I agree, in fact I think ISM (PE) should be expanding.  Still, for target forecasts I am compressing ISM 1% each quarter because the market is irrational.

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  • Posted: 13 February 2011 06:06 PM #17

    Gregg Thurman - 13 February 2011 07:08 PM
    Sparky - 13 February 2011 07:04 PM
    DawnTreader - 02 February 2011 06:00 AM

    A quick comparison of Apple’s p/e multiples with and without cash on dates that followed the release of quarterly earnings reports.

    Snippet: No matter the 77% rise in the share price between February 1, 2010 and today, the share price appreciation has essentially only kept pace with the 75% gain in 12-month trailing earnings per share. The sans cash share price has risen 85% since February 1, 2010 yet the cash adjusted p/e multiple remains well within the recent historical range. At today’s closing price of $345.03, AAPL remains moderately priced based on a comparison of the five quarterly dates selected. The shares are positioned for at least modest appreciation over the next few weeks and prior to the expected run-up of the share price in anticipation of March quarter results.

    Apple is building cash while increasing profits. I don’t see a high risk of p/e compression over the next year.

    I agree, in fact I think ISM (PE) should be expanding.  Still, for target forecasts I am compressing ISM 1% each quarter because the market is irrational.

    Irrational?  :-o When did that happen?  :wink:

    Seriously… That’s why my 12-month target price remains under $600 for this round of the AFB member index. I do expect strong March quarter results with the potential drawdown of existing iPad inventory the only real wildcard in the numbers. The cash gains per quarter are almost unreal.

         
  • Posted: 17 February 2011 05:59 PM #18

    DT, I read your 12-month price target post. Are you saying your price target and eps growth estimates are conservative?

         
  • Posted: 17 February 2011 11:19 PM #19

    Sparky - 17 February 2011 09:59 PM

    DT, I read your 12-month price target post. Are you saying your price target and eps growth estimates are conservative?

    I consider my estimates to be neither aggressive nor ambitious. I’d like to see March quarter results for confirmation of certain revenue and earnings trends. I do expect 70% revenue growth on average this fiscal year and looking at models that suggest at least 50% revenue growth in FY2012 due to a broadening of the company’s revenue base.

         
  • Posted: 28 February 2011 06:30 PM #20

    Found on Seeking Alpha, a good post about big cash positions…

    http://seekingalpha.com/article/255470-how-much-cash-is-too-much?source=qp_article

    Professor Aswath Damodaran from NYU?s Stern School of Business tackled the popular notion that companies are holding too much cash. These arguments have been increasing in the media in the wake of the massive cost cutting done throughout the Great Recession which, now that revenues are growing again, is resulting in ever-increasing cash balances (in the aggregate) on corporate balance sheets.

    Damodaran argues that it is improper to say that companies like Apple (AAPL), by having massive cash balances earning less than the company?s cost of capital, are ?leaving money on the table.? The proper discount rate is not the company?s cost of capital, but instead the discount rate associated with that ?project?, namely the interest rate on the cash, which makes cash a neutral investment, by definition.

    No investor in a company is ever hurt by cash being invested in low return, riskless assets (commercial paper, treasury bills). What investors should worry about is what the company may do with the cash: take bad investments or overpay with acquisitions. I would rather that the cash earn 0.16% in T.Bills than be invested in projects earning 6%, if the cost of capital for those projects is 9%.

    To make a judgment on whether to attach a ?stupidity discount? to cash, investors should look at a company?s track record. They should discount cash balances in the hands of companies that have a history of over reacting, poor investments and bad acquisitions. They should not discount cash balances in the hands of companies where managers are selective in their investments and have earned high returns (on both projects and for their investors).

    Damodaran even has an academic study he authored on the subject: Dealing with Cash, Cross Holdings and Other Non-Operating Assets: Approaches and Implications.

         
  • Posted: 28 February 2011 11:42 PM #21

    Put a reasonable return on Apple’s cash assets and it significantly moves eps. The return on the cash holdings will gradually move higher in the coming quarters and combined with the each quarter’s cash pick-up we are looking at some attractive gains in earnings from cash alone over the next two years even with a few small acquisitions along the way.

         
  • Posted: 01 March 2011 12:02 AM #22

    I read it sometime back the a lot of cash held by Apple is outside US and if repatriated then will be taxed @35%. Does anyone know how much cash or equivalent does Apple have in which countries? Is that info public?

         
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    Posted: 01 March 2011 12:21 AM #23

    libranca - 01 March 2011 04:02 AM

    I read it sometime back the a lot of cash held by Apple is outside US and if repatriated then will be taxed @35%. Does anyone know how much cash or equivalent does Apple have in which countries? Is that info public?

    Suppose Apple has 10 billion in banks that would be taxed if repatriated.  Instead of being taxed, Apple just sends much back to Samsung and Honghai for more iDevices.  Some of that money need never come home.

         
  • Posted: 01 March 2011 12:32 AM #24

    libranca - 01 March 2011 04:02 AM

    I read it sometime back the a lot of cash held by Apple is outside US and if repatriated then will be taxed @35%. Does anyone know how much cash or equivalent does Apple have in which countries? Is that info public?

    I’ll leave this to better tax minds than mine (Mercel, where are you?), but I doubt Apple would pay anywhere near 35% on repatriated earnings since foreign taxes have been paid on those earnings. Cash in and of itself is not the taxable element but is the outcome of profitable activities. Repatriated earnings might come at a cost, but a full domestic tax levy following the payment of foreign taxes seems extraordinarily high.

    Building on Tetra’s point, Apple is a global enterprise and foreign earnings can be reinvested in the local and regional economies in which it is earned. US corporate tax rates are among the highest in the world and this tax rate disparity does as much (or more) to push jobs outside the US as the disparity in compensation demands.

         
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    Posted: 01 March 2011 12:57 AM #25

    Let’s not forget we have companies like Google that had an overseas tax rate of 2.4% (a pittance compared to Apple) through the use of lax rules in Ireland, the Netherlands and Bermuda. Facebook is about to do the same.

    Why isn’t Apple doing likewise???

         
  • Posted: 01 March 2011 01:17 AM #26

    adamthompson3232 - 01 March 2011 04:49 AM

    I have limited knowledge in the foreign tax area but since my brother’s business operates in many different countries and since I own a piece of it I have a bit of experience here. Income earned in other countries is subject to that country’s income tax code. If, for instance, income tax is 30% in Belgium then Apple’s earnings in Belgium would be taxed at 30%. Then, if Apple brings that money to the U.S. it would be subject to the U.S. income tax code. However, since income tax of 30% was paid in Belgium there is a “foreign income tax credit” on those earnings of 30%. So, if the U.S. tax rate is 40%, those earnings would only be subject to a 10% tax rate (the U.S. rate of 40% less the Belgian 30% rate).

    This is a VERY simplified hypothetical scenario but I believe it is generally how Apple would be taxed on repatriated earnings from other countries.

    at, your “simplified hypothetical scenario” is along the lines of my understanding as well. Again, I’m not a tax expert let alone an expert on foreign earnings and repatriated income. Under this scenario it does makes sense for Apple to invest non-domestic earnings in the regions in which it is earned to avoid a any repatriation tax adjustments and to grow revenue and earnings in regions with lower tax levies.

         
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    Posted: 01 March 2011 01:19 AM #27

    ChasMac77 - 01 March 2011 04:57 AM

    Let’s not forget we have companies like Google that had an overseas tax rate of 2.4% (a pittance compared to Apple) through the use of lax rules in Ireland, the Netherlands and Bermuda. Facebook is about to do the same.

    Why isn’t Apple doing likewise???

    Because Apple won’t be evil.  :innocent:

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  • Posted: 01 March 2011 01:25 AM #28

    ChasMac77 - 01 March 2011 04:57 AM

    Let’s not forget we have companies like Google that had an overseas tax rate of 2.4% (a pittance compared to Apple) through the use of lax rules in Ireland, the Netherlands and Bermuda. Facebook is about to do the same.

    Why isn’t Apple doing likewise???

    Again, I’m not a tax expert but both Google and Facebook are primarily service-based businesses. Apple is a global retailer and maker of hardware devices. I suspect there’s some leeway for services such as Google and Facebook based on the source location of the services provided (for example, where the servers are located, etc.) and the lack of an operational footprint in the regions served allowing more play with the declarations as to where revenue is “earned.”

         
  • Posted: 09 March 2011 03:57 PM #29

    DawnTreader - 02 February 2011 06:00 AM

    A quick comparison of Apple’s p/e multiples with and without cash on dates that followed the release of quarterly earnings reports.

    Snippet: No matter the 77% rise in the share price between February 1, 2010 and today, the share price appreciation has essentially only kept pace with the 75% gain in 12-month trailing earnings per share. The sans cash share price has risen 85% since February 1, 2010 yet the cash adjusted p/e multiple remains well within the recent historical range. At today’s closing price of $345.03, AAPL remains moderately priced based on a comparison of the five quarterly dates selected. The shares are positioned for at least modest appreciation over the next few weeks and prior to the expected run-up of the share price in anticipation of March quarter results.

    DT, what about the cash pick-up this quarter from maybe an 80% increase in revenue? Could we see a big post-earnings jump in the share price?

         
  • Posted: 09 March 2011 07:41 PM #30

    Sparky - 09 March 2011 07:57 PM
    DawnTreader - 02 February 2011 06:00 AM

    A quick comparison of Apple’s p/e multiples with and without cash on dates that followed the release of quarterly earnings reports.

    Snippet: No matter the 77% rise in the share price between February 1, 2010 and today, the share price appreciation has essentially only kept pace with the 75% gain in 12-month trailing earnings per share. The sans cash share price has risen 85% since February 1, 2010 yet the cash adjusted p/e multiple remains well within the recent historical range. At today’s closing price of $345.03, AAPL remains moderately priced based on a comparison of the five quarterly dates selected. The shares are positioned for at least modest appreciation over the next few weeks and prior to the expected run-up of the share price in anticipation of March quarter results.

    DT, what about the cash pick-up this quarter from maybe an 80% increase in revenue? Could we see a big post-earnings jump in the share price?

    I’ll be updating the chart following the release of March quarter earnings.  grin