Everybody wants to love Apple (AAPL), except those that don’t own it. If you don’t own it, don’t sweat it. We still very much like the company, but there are a number of other companies where we can certainly find common ground.
Our cost basis on Apple is but a fraction of where it is trading, and we’re still happy with the latest transaction from the July 24, 2013, email transaction alert when the company was added to the Dividend Growth Newsletter portfolio and when the existing position in the Best Ideas Newsletter portfolio was increased. To us, Apple is not so much a technology company, as it is levered to the ongoing strength toward consumer mobilization, which is inevitable. The firm’s ecosystem cannot be replicated, and its balance sheet continues to be padded with strong cash flow generation. Look for ongoing share buybacks and dividend increases for many years into the future.
If you don’t like Apple because Warren Buffett may not like technology, or you are conservative, here’s an interesting statistic: after spending billions on share buybacks during its two fiscal quarters of the year, Apple ended its fiscal second quarter with $193 billion in cash and investments. Berkshire Hathaway’s market capitalization is ~$360 billion. Apple could buy the Oracle with a half-cash, half-stock deal in one fell swoop, and it won’t even miss the cash. Apple has staying power – the numbers simply mean it cannot become the next Blackberry (BBRY) or Motorola Razr (MSI). It’s a mathematical impossibility. Any threat can simply be bought out.
World domination?
Mr. Icahn (IEP) thinks so. The activist investor has brought even more attention to the high-flyer with his latest letter. In it, Icahn raised his price target of Apple $24 to $240 per share, and while we think this number is a bit high, we do think that the company’s shares have upside to the high end of our fair value range, which is a more-conservative $160 per share. Icahn’s new price target is based on a multiple of 18 times expected fiscal 2016 earnings per share of $12 (excluding net interest income) + $24.44 per share in net cash.
Maybe this is old news, but Apple continues to prove doubters wrong. What was once a pipe dream to spectators–seeing Apple at a split-adjusted price of $1,000 ($143 per share)–is now within reach, and Icahn’s view that Apple will dominate new categories is a serious reality. Let’s think for a second: with the momentum of Apple’s ecosystem and its presence in the consumer psyche, can you see customers lining up to buy the first iCar? We can–even if we’re not going to buy an Apple car ourselves. The market continues to have it wrong, and no matter your opinion of Mr. Icahn, he makes some really good points:
It is our belief that large institutional investors, Wall Street analysts and the news media alike continue to misunderstand Apple and generally fail to value Apple’s net cash separately from its business, fail to adjust earnings to reflect Apple’s real cash tax rate, fail to recognize the growth prospects of Apple entering new categories, and fail to recognize that Apple will maintain pricing and margins, despite significant evidence to the contrary. Collectively, these failures have caused Apple’s earnings multiple to stay irrationally discounted, in our view…When we compare Apple’s P/E ratio to that of the S&P 500 index, we find that the market continues to value Apple at a significantly discounted multiple of only 10.9x, compared to 17.4x for the S&P 500, awarding the S&P500 with a 60% premium valuation to Apple.
Apple is a holding in both newsletter portfolios. From our perspective, there’s no hype or “bubble” surrounding Apple’s stock. With a balance sheet and free cash flow stream like Apple’s, the company’s shares have solid fundamental support, and that won’t change anytime soon. The company’s strongest competitive advantage may be that it can buy almost anything…in this light, what’s the competitive threat?
Apple is a fantastic example of the potential price performance of a “wide” moat and a highest-rated Economic Castle all in one.