Financial data and analysis
Speaking of correlation…
General Electric, the largest holding in the S&P 500 Value Index Fund, has a forward price-earnings ratio of fourteen. Apple, the quintessential growth stock and largest member in the S&P 500 Growth Index Fund, sports a P-E based on forward 12-month estimates of just 15.5 right now.
via CNBC’s Fast Money : Growth Vs. Value Confusion as Apple, GE Treated Equally – CNBC.
My recent exposé of Apple’s cash (and cash equivalents and long-term securities and short-term securities) drew quite a bit of attention, which is good. Because it needs to be demystified. However, the story does not end there. Part of the problem of cash is that the liquid stuff can often itself change in perceived value due to mis-management.
Cash has to be valued on the basis of what’s to become of it. So what can become of it?
The value in liquid assets can be returned to shareholders in the form of a dividend, which means double taxation on profits; not the best idea usually. Or it can be returned in the form of share re-purchase which tends to have only a temporary effect on share prices, again not a great return. The value can also be increased by means of investment in projects that return higher than what investors expect their cost of capital to be. This is the best option but investment is difficult when the amount involved is so big that no project or set of projects could possibly cost enough to employ the capital. Finally, the value can be completely destroyed through large acquisitions.
I say destroyed because the history of large acquisitions is almost universally known to be value destructive (1). The urge to M&A is why cash on the balance sheet for large companies is usually discounted and share prices “get no credit for it.” This is plaguing Apple with a P/E ex-cash in the teens.
Is this fair?
Continue reading “Why Apple's cash is worth more than Microsoft's cash”
The saga of Nokia’s challenges has been well documented in this weblog.
For this quarter, we take a look at the sequential deterioration in Nokia’s bottom line and draw causal inferences to its lack of competitiveness in mobile operating systems.
First, the bottom and top lines are shown below (in blue) and compared with Apple (in orange):
The charts show how Nokia’s bottom line (left) collapsed while the top line (right) remained relatively solid. By comparison, Apple remained consistent in revenue with slight dip in profit as it transitioned to a new model.
The top line (sales) is the product of units sold and their average selling price (ASP). Here are these two quantities side-by-side:
Note how Apple’s units are hard to discern relative to Nokia’s volume and how the opposite is true for the selling price. These values include all phones sold by the companies.
The story is a bit more clear when comparing the smartphone part of Nokia’s business, again with units and ASP:
The story here is telling: even in smartphones, Apple’s ASP is dramatically higher and much more resilient.
The question has to be why: Why can Apple retain not only higher prices (and hence margins)? The answer is competitiveness. Margin is an indication of value created and value differential is competitive differentiation. All the user satisfaction surveys, the reviews and tests boil down to these hard numbers above. The deterioration of Nokia’s business is directly traceable to its historic failure to embrace mobile software as a disruptive force and instead using it to sustain a hardware business.
Updating the graph showing daily P, P/E and (P-$)/E since October 2006. (P-$)/E is the same now as it was in August 2009 and shows no consideration for 75% average earnings growth since then. As guidance and analysis shows, this growth is likely to continue for a few more quarters.
The following chart shows the value of sales per quarter (in $million) since the beginning of 2005. What’s interesting to note is that more than half of sales is contributed by products which did not exist three years ago (iPhone and iPad). Music and iPod did not exist 10 years ago. It’s entirely appropriate that Apple removed “Computer” from its name, though they still sell mostly computers of a different kind.
asymco | Apple’s Valuation Struggle.
As despondency over Apple’s 75% earnings growth rate continues, it’s time to revisit the historic P/E in contrast to growth for the company’s earnings.
The latest chart (below) shows the company’s P/E ratio (in blue, left scale) vs. the trailing twelve months rolling growth rate (in brown, right scale) and the ratio between these two (in red, right scale).
The red line can be considered a form of PEG (Price over Earnings over Growth) with the caveat the the Growth is trailing not forward and hence is based on actual data not fictional analyst “consensus”. I call this PETG (Price over earnings over trailing growth).
The actuals show that Apple’s price to trailing growth ratio is dropping to lows unseen since last year when the recession was still in effect. At PETG below 20 the predominant sentiment displayed is extreme pessimism. 100 could be considered an even balance between pessimism and optimism. It now stands at 35.
Following up on last quarter’s “asymco | Apple’s Growth Scorecard.”
June quarter showed a significant increase in sales growth (due to the iPad) while the iPhone growth moderated to 74%. Overall earnings growth is a solid green.
Historic Apple stock price vs. earnings (in green), and 20x earnings (in red) and 30x earnings (in purple). Earnings are restated according to current financial reports from the company.
Recent commentary in financial press (e.g. FT Alphaville » Lost in correlation fatigue and The Herd Instinct Takes Over, Amber Waves of Pain) points out how the markets have become insensitive to fundamentals or valuation itself.
Symptoms of this are:
Structural changes such as the proliferation of exchange-traded funds and super-rapid computer-based bloc trading, activities that are totally unconcerned with valuation metrics and/or long-term trends, are still taking place and there is little or no prospect of this development coming to an early end.
It means you can’t trust any valuation. I could have valued a subprime CDO better on May 6 than any equity. And it’s almost the same thing all day long. Valuations and prices have been divorced for a while. Just look at the volatility. It’s not like traditional trading. No wonder there are such increased correlations.
What this has to do with mobile computing? Interestingly, I find that Apple is not just a victim of this de-coupling of fundamentals from valuation. I hold out hope that the stark facts of its performance might actually pop this correlation bubble.
The hope comes from the fact that trading strategies have finite lives. As soon as a strategy develops to a point of being widely used, it makes sense for a contrarian to “short” or bet on the reverse of that trend, taking advantage of the tendency to overshoot. I don’t have a strong handle on this phenomenon, but the chances are that value/fundamental investment will be back with a vengeance and Apple might just be the leader, by sheer weight of numbers.
During the last quarter, the company added $4.1 billion in cash to reach a total of $45.839 billion or $49.43 per fully diluted share. This is divided into three types of holdings (long- and short-term marketable securities and cash equivalents).
Some (most?) financial reporting services do not include long-term marketable securities in their databases. This is a tragic error which mis-states most of the balance sheet ratios that investors may depend on. Offending sources include Capital IQ (which feeds finance.yahoo.com.)
To illustrate, the following chart shows the total cash equivalents for the company. The orange colored bars represent long-term securities. If they are excluded, an investor may conclude that Apple’s cash has been *declining* since 2008 when the opposite is true. The company is shifting an increasingly larger proportion of its holdings to long-term (but fully liquid) securities.
The company devotes 9 pages in its 10-Q to describe and value the cash positions it holds. It’s a pity that most aggregators of the company data don’t bother to note $21 billion in assets.
