Apple Inc. (AAPL, Financial) has seen over $25 billion in market cap value wiped away thanks to slow iPhone growth and Carl Icahn (Trades, Portfolio) trimming his position. Clearly the global economy is slowing down, which is resulting in a slow down in iPhone sales. But this doesn't mean there isn't value in Apple. The company has over $200 billion in cash and has repurchased over a $100 billion dollars of its shares over the last few years. Apple has continued to increase its share repurchase program, which now stands at $180 billion. This has resulted in the company increasing debt to 20% of its balance sheet; however, the company produces more than enough in operating cash flow to pay this down with five years.
Business overview
Apple is a multinational technology company that designs, develops and sells consumer electronics, computor software and online services. The company has been a revenue and earnings boom ever since 2007 when founder Steve Jobs unveiled the iPhone. Since then the company has produced various generations of the iPhone, which has been highly popular with consumers. The company has continued to produce other ground-breaking devices like the iPad and now the Apple Watch. All of these devices operate on Apple's own operating system. Developing both the hardware and software for their devices has given the company a competitive advantage against its competitors.
Financial
Apple is a cash cow with over $200 billion in cash and marketable securities offshore. The company continues to return cash to shareholders through increased buybacks and raising the dividends. The company had to use financial engineering to return billions in cash to shareholders, while avoiding paying taxes on that cash. Apple's financial engineering has resulted in 20% of its balance sheet being composed of debt. The company, however, produces more than enough in operating cash flow to pay off its debt in less than five years.
Valuation
Apple is selling for less 10x its free cash flow and owner earnings thanks to the market sell-off. Thanks to the sell-off caused by China worries and Icahn reducing his position in Apple, investors can purchase it at a discount to business value. Currently Apple is offering investors a free cash flow yield of 13% and owner earnings yield of 14%. Apple owner earnings in 2015 was $9.95 per share and free cash flow was $12.00 per share, both higher than the year before. The company continues to grow its owner earnings and free cash flow thanks to increases in sales and share reductions. As the company continues to reduce its shares outstanding, this will lead to higher owner earnings and free cash flow per share. The combination of share reduction and increase profits will lead to higher estimated business value for Apple. Apple should trade for 14x its owner earnings and free cash flow. At this level, Apple would sell between $139 and $168 per share.
