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Dheeraj Grover
Dheeraj Grover
Articles (493) 

Pat Dorsey : Apple is Cheap, Buy at These Levels

January 27, 2013 | About:

Pat Dorsey, well-known author of value investing book, "The Little Book that Builds Wealth" and current investment officer at Sanibel Capital Investment Advisers, was on Bloomberg to discuss his views on Apple (NASDAQ:AAPL) and its valuation.


-- Business is valued really cheap at 15% FCF yield, which says Apple is dead. To Dorsey, Apple may be slowing but it isn't dead.

-- Smartphones are 30% of the mobile device market worldwide and about 60% in US. Apple has tremendous customer loyalty.

-- Couple that with the switching cost of lock into the ecosystem as the cost of moving from iOS ecosystem to Android system is very high.

-- Apple is not going the way of Motoroloa (MSI) and Nokia (NOK).

-- Apple has never been expensive, have always traded around 9% cash yield and it is trading at 15% cash yield now.

-- Dorsey stuck with his call on ignoring what Washington is doing as corporate America has done a good job of increasing earnings and they will continue to do so, which is more important from an investor's standpoint rather than what will happen with the fiscal cliff or debt ceiling.

Credit and Source: www.bloomberg.com, Bloomberg

Here is the video:

About the author:

Dheeraj Grover
I am an individual investor with deep interest in the field of value investing. My ideas and thinking is inspired by highly respected value investors like Ben Graham, Warren Buffett, Walter Schloss, Bill Ruane and Tweedy Browne

Rating: 4.3/5 (4 votes)


Batbeer2 premium member - 5 years ago
>> ... always traded around 9% cash yield ...

AAPL may go up down or sideways, I don't know, but that statement is just silly.

>> Business is valued really cheap at 15% FCF yield, which says Apple is dead.

7x doesn't even come close to "left for dead'.

I've seen businesses with similar balance sheets and margins at 2x FCF.
Crafool - 5 years ago    Report SPAM
It is hard for me to see Apple even after its decline in value as "Cheap". I mean I see the current P/E at 10 and the Forward P/E at around 9.7. This is of course after the latest decline in share price. If this was a majorly diversified company with a long history, I would be thinking it seems cheap, but this is not the case. Apple's first mover advantage in the consumer space has been incredibly rewarding to say the least. Apple's earnings have increased from $3.93 per share in 2007 to around $44.15 in 2012. My problem is trying no to believe that Apple's current earnings aren't peak earnings rather than normalized earnings.

I know that Warren Buffett likes to look at past earnings like his mentor Ben Graham, however Graham looked at past 10-years and Buffett looks only at last 5-years. One assumes that this is how Mr. Buffett tries to figure out the normalized earnings of a company for 5-years should generally cover at least 1 economic cycle that should give an idea of how a company and its products/services performs in both good and bad times. Apple's average EPS per share for the last 5-years is around $20.28 per share. This is about 45% of its 2012 earnings per share. When I value Apple's stock with these earnings the stock currently trades at a P/E of 20.28!!! I don't see that as cheap since that it is far higher than the S&P 500's P/E of around 14 times and over double the P/E of Microsoft.

Of course, I did not look at Apple's valuation considering the mountain of cash that it has on hand or Microsofts. So lets do it now. Apple's cash on hand would drop its enterprise value considerably. For simplicity I will say Apple has around $125 per share of cash and investments, which drops its P/E to 7.13 and based on the $20.28 EPS average over the last 5-years it drops the P/E to 15.52. Again, the P/Es look appealing on a 12-month trailing basis, but not on the average earnings over the last 5-years.

The key is what is the company's normailized earnings. Warren buffett famously says that he stays away from tech companies because it is outside his circle of knowledge (Yes, I know he is now buying IBM, but for its services rather than technology.). Buffett likes companies with durable moats. One thing I see is that Apple is sitting on a mountain of cash!!! Why so much? Well, I think it is because Appl like a lot of other tech companies realizes that it doesn't have the durability of say a ketchup maker like Heinz or soda maker like Cocoa-Cola. It needs that cash in case it misses a product cycle like Nokia, Motorola, Sony and Apple itself has done.

Apple has the rewarding first mover advantage of the consumer electronic/mobile part of technology, but as rewarding as this segment is when you get it right it is equally brutual when you miss. Apple's products and stock have probably reached peaks. Apple products have maximum penatration and its stock has maximum ownership.

My family and I have two i-phones, three i-pads and an Apple Mac. I own an i-phone because I wanted better internet access than I could get from my Motorola phone, but now I have an i-pad and use it for internet and no longer the i-phone. When the phone goes out, I most likely will not be getting another i-phone but rather whatever phone the provider is giving away that allows calling and texting. That is all I need, however my fashion concious wife may still want an i-phone. She is not aware of alternatives yet. As far as the i-pad is concerned, I use a Dell Lap-top at home and am using it now, and a Dell at work. I most likely will being going to the Microsoft Surface Pro when it is available. My father has one and it is very impressive. I now I might be an exception rather than the rule, but I know that no other phones, computers and tablets were on the market to compete with Apple when it posted dramatice increases in earnings these last 5-years. I think the first mover advantage may be receding for Apple especially since Microsoft's release of Windows 8 has the knock on effect that many coporate IT departments now see Windows 7 being discounted and since it has been out for a while that it is free of bugs. Many will most likely make the move finally fromWindows XP to Windows 7. I always remeber the popular expression said by many coproarate Heads of IT Departments, "You don't get fired for hiring IBM". I don't think IBM is recommending to coporations, governments or schools here or abroad to move away from Microsoft based computer systems to Apple. Microsoft is embedded in technology, and Apple has not achieved this yet or if ever. Thus, Apple's moat is only as efffective as its latest innovation. I know Apple TV, but remember Dell TV? I had one. It was the first affordable flat screen and now they aren't even a player!

As far as Apple stock price, I think it reached saturation. I think Fidelity in its closet index approach to investing has several funds with Apple with its top holding. Fidelity had Apple at 5% to 10% of many of its funds. As long as Apple was climbing, Fidelity was getting Alpha, but now that it is falling it is hurting their returns. Many technology ETFs have between 14% to 18% in Apple, which is nearly double the waiting to Microsoft. Apple's decline is hurting these funds and ETFs and that will have managers and investors selling. As Apple falls in price managers and investors will continue selling since most of the current holders are growth and momentum investors. Where did Fidelity and ETFs get the money to extremely over weight Apple? Could it be from Microsoft stock, and now that they are lowering their weightings will they be buying Microsoft to bring it into line with its weighting in the S&P 500? I think it is definitely possible.

Apple will find a bottom when value investors in size start to move into the stock, and that won't occur until the can buy at a level with an acceptable margin of safety in the stock. If Apple's normalized EPS is around its 5-year average EPS then I would say that an acceptable margin of saftey would be around a 12% earnings yield before tax. _ That puts the value of Apple at about $202 for the company (5-yr. average EPS of $20.28 x 1.20 (20% taxes) = $24.336 / 12% = $202) and since it has so much cash on hand around $125 per share, it puts its stock price at around $327 per share!!!

In my opinion, the cheap tech stock most investors should be looking at is obviously not Apple, but rather good old Microsoft. If any tech company could have a "durable moat", it is Microsoft in my opinion. Microsoft's trailing 5-year average earnings is around $2.22 and based upon a $27.88 share price minus about $5 in current assets gives an Enterprise Value of around $22.88 and an earnings yield of around 9.70% after tax and 11.64% before tax (taxes estimated at 20%)!!!

Microsoft with Windows 8 and Surface tablets along with all its manufacturing and service partners partners Lenovo, DELL, HP, Samsung, Nokia, IBM, and others is just beginning a new cycle to go with its entrenched business versus Apple's cycle that will contend with them.

Well, I hope this helps. Obviously, you need to do your own homework and should rely on anyone elses!!! THings can and do change.

Happy investing to all!!!

I am long Microsoft and have no position in Apple. I am watching Apple to see if Mr. Market will serve it up to me. I am patient for it took over 12-years for the market to serve Microsoft up to me!!!

Beltrancaceres - 5 years ago    Report SPAM
thanks crafool. cogent write up.
Jonmonsea premium member - 5 years ago
Cragfool,mthanks for article response.

I am very hesitantly moving into aapl, but probably should not be quite so hesitant. I think your buffett related argument is confused. Buffett doesnt invest in companies whose normalized earnings are lower than current earnings, does he? He invests in companies that have staying and price power.
Jonmonsea premium member - 5 years ago
Also cragfool where did u read about 5 yr vs 10 yr buffett graham differences?
The Science of Hitting
The Science of Hitting - 5 years ago    Report SPAM

In regards to his "land grab" argument, has anybody actually seen data suggesting this is true? I've heard this many times before but want to see hard data proving it (particularly over a period of years - not 1 product cycle); thanks!
Crafool - 5 years ago    Report SPAM

1.). Buffet's look back of about 5-years is disclosed/described in his former daughter in-laws' book, "Buffetology by Mary Buffett".

2.). "Buffett doesn't invest in companies whose normalized earnings are lower than current earnings, does he? ". First, I would say that Buffett would not be a buyer of Apple stock here or lower. My argument is that Apple does NOT have a huge moat or barrier to entry like a Coca-Cola or Wrigley. Apple like almost all technology companies is vulnerable to technological obsolescence risk, and the risk of missing a product cycle. Second, Buffett does buy businesses where his estimate of normalized earnings is lower than the companies current earnings. Remember, Buffett's investment style in the past of buying "Cigar Butt" companies like Berkshire Hathaway itself (Former textile company) and today it would most likely be his recent purchases of newspaper companies.

i hope this helps! Again, please do your own homework and never rely on others.

Happy investing!

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