TheStreet.com has published an article Thomas Lepris called Apple No Bargain as Crunch Time Nears. Many AAPL investors and Mac fans are going to take offense at the TheStreet.com article, and that is in part because it ignores some fundamental facts and issues about Apple and the computer industry. That said, Mr. Lepris does bring up some very interesting issues that merit a closer look. For instance, Mr. Lepris says that far from making Apple an undervalued company, its large cash holdings actually make Appleis valuation make even less sense. According to the article:
The most common defense of Appleis value is its considerable cash reserves. As of March 31, the company had $4.1 billion in cash and short-term investments. That works out to $12.21 a share in cash, a solid floor for the companyis stock. And bulls point out that if you discount all that cash, Apple looks very cheap. The stock closed Thursday at $23. If $12 of that is cash, the market is valuing the enterprise itself at just $11 a share.
The question is largely academic. No one at Apple is about to break up the cash from the rest of the company. Indeed, it will need to start spending when it starts building its retail stores. Still, carrying the argument through to its conclusion produces surprising results. Apple earns a considerable sum of interest on its cash, so valuing the enterprise apart from that cash would necessarily involve omitting that income. GKMis Bailey, for one, expects Apple to earn 60 cents a share in fiscal 2002. But when he excludes interest and other income, his estimate drops to a mere 21 cents a share. On that basis, Apple is currently trading at an incredible 52 times its 2002 earnings.
Itis true that Bailey is less optimistic than many other analysts. But even more mainstream views make the same point. Subtracting interest and other income from Multex.comis consensus estimate of 77 cents a share leaves Appleis estimated 2002 earnings per share at 38 cents. Using that figure, the market is valuing Appleis enterprise at 29 times its 2002 earnings. As it stands right now, forgoing the clumsy exercise of valuing the company apart from its cash, Apple is trading at just under 30 times 2002 earnings estimates.
In other words, separating the cash from the enterprise does nothing to make Apple look any cheaper.
An interesting argument to be sure. There are many other issues covered in this article, and we recommend you check it out.