Saturday, February 19, 2005

Investment Roundtable - Apple Computer (Nasdaq: AAPL)

This weeks Investment Roundtable is discussing Apple Computer (Nasdaq: AAPL). I kind of dreaded this choice by the Roundtable members. This company is very difficult to analyze intelligently. AAPL is obviously not a value pick, but as always I like to add my two cents to the Roundtable process.

Fundamentally, this company is rather expensive based on Benjamin Graham criteria:

P/E 70 = No, Benjamin Graham criteria requires a P/E below 20.

Price/Book 6.14 = No, BG criteria requires a P/B value below 1.5

Current Ratio 2.6 = Yes, BG criteria require a CR above 2.

Revenue Growth -0.68% (Avg 10-YR) = No, BG criteria requires a 15% growth rate.

Intrinsic Value $60.20 = No

Yield 0% = No

Apple Computer passes one out of our six requirements, which gives it a value score of 16.67%. Over at the Guru site on nasdaq.com AAPL received a Benjamin Graham value score of 43%. Here are the details of their report:

SECTOR: [FAIL]

AAPL is in the Technology sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published. At that time they were not the driving force of the market as they are today. Although this methodology would avoid AAPL, we will provide the rest of the analysis, as we feel times have changed.


SALES: [PASS]

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. AAPL's sales of $9,763.0 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: [PASS]

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. AAPL's current ratio of 2.58 passes the test.


LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS]

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for AAPL is $0.0 million, while the net current assets are $5,098.0 million. AAPL passes this test.


LONG-TERM EPS GROWTH: [FAIL]

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for AAPL were negative within the last 5 years and therefore the company fails this criterion.


P/E RATIO: [FAIL]

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. AAPL's P/E of 70.59 (using the current PE) fails this test.


PRICE/BOOK RATIO: [FAIL]

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. AAPL's Price/Book ratio is 6.14, while the P/E is 243.90. AAPL fails the Price/Book test.

So, Apple Computer is not a value play…big surprise. Apple Computer is a recent growth story with the implementation of the iPod and iTunes strategy. It’s obvious that AAPL has made its recent resurgence because of one product. There are only so many people that can be a customer for a company’s one product. Standard and Poor’s believes that year-over-year growth rates from iPod sales peaked in the December 2004 quarter and they also expect the revenue growth rate to decelerate over the next year. It will now be up to Mr. Jobs to turn that success into a launching pad for Apple’s other products.

Mr. Jobs began their retail strategy to entice new iPod users over to the Mac family (some would describe it as a cult). They had 86 stores at the end of FY 04 and want to bring that number up to 125 by the end of FY 05. This strategy seems to be working pretty well. AAPL is expected to have revenue growth of 55% in FY 05. This strategy isn’t keeping very many of their past resellers happy. There is a recent lawsuit from these resellers that could be a downer for price appreciation.

Will iPod users convert to Mac PC users? Doubtful at best in my humble opinion. This leads me to believe that the stock price is over extended. Let’s take a look at the technicals to see just how extended AAPL is. As always, I believe I help out the Roundtable process with my long-term outlook on investing. We’ll start by looking at the monthly view:


Click to Enlarge Monthly Chart Posted by Hello

As you can see by the monthly chart, AAPL began its recent rise from a breakout from a three year base in March 2004. The only thing this monthly chart is telling me is that this recent rise had been rapid and unsustainable.


Click to Enlarge Weekly Chart Posted by Hello

The weekly chart doesn’t really clear much up.


Click to Enlarge Daily Chart Posted by Hello

The daily chart at least leans a little bit to the helpful side of the equation. You can see two triangles that have helped spring AAPL higher and higher. This past triangle has a minimum target of $102 (($70-$33) + 65), which would be a gain of 17.5% from here. I don’t know if it is worth the risk of finding out if AAPL makes it to there.

This is why I dreaded writing a report about Apple Computers. With a price run-up of almost 250% in under a year it is hard to imagine that there is much room left to the upside. But, if the late 90’s taught us investors/traders anything it is that you should never under estimate the psychological factor. AAPL could get pushed up to $200 (Pre-Split) before it crumbles. With the split emerging on February 25th Apple could find a whole new group of investors interested.

In summary, I wouldn’t be putting my hard earned money into Apple Computer stock. The risks far outweigh the rewards. There are many other good looking candidates out there with much better risk/rewards ratios. You would be better served in finding one of those.

Please visit the other members of the Investment Roundtable to see what they have to say as well:

Ron's Stock 'n Stuffer World
Sixth World Managment and Commentary
GalaTime
Jaloti
Bill Cara

Best Regards,

The Soothsayer of Omaha

2 Comments:

Anonymous Mario said...

I enjoy the blog here. The's a bearish argument on AAPL here that might be of interest:
http://www.anumati.com/blogs/anumatiblog/archive/2005/02/19/74.aspx

7:46 AM  
Anonymous Soothsayer of Omaha said...

Mario,

Thanks for the comment and the link. The argument the link uses is a very common one for the bearish view of AAPL and very true.

Thanks for the comments and keep them coming.

Best Regards,

The Soothsayer of Omaha

3:46 PM  

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