Benjamin Graham taught that intelligent investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.
This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy. By using the ModernGraham method, one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Apple Inc. (AAPL, Financial) fares in the ModernGraham valuation model.
Company profile
According to Google Finance, Apple designs, manufactures and markets mobile communication and media devices, personal computers, portable digital music players and a variety of related software, services, peripherals, networking solutions and third-party digital content and applications.The company also delivers digital content and applications through the iTunes Store, App StoreSM, iBookstoreSM and Mac App Store. The company distributes its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In February of 2012, the company acquired app-search engine Chomp.
Downloadable PDF version of this valuation:Â ModernGraham Valuation of AAPL - January 2017
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of intelligent investor are you?
| Defensive Investor; must pass 6 out of the following 7 tests. | Â | Â | ||
| Â | 1. Adequate Size of the Enterprise | Market Cap > $2Bil | $631,200,766,813 | Pass |
| Â | 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.35 | Fail |
| Â | 3. Earnings Stability | Positive EPS for 10 years prior | Â | Pass |
| Â | 4. Dividend Record | Dividend Payments for 10 years prior | Â | Fail |
| Â | 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | 477.43% | Pass |
| Â | 6. Moderate PEmg Ratio | PEmg < 20 | 15.03 | Pass |
| Â | 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 5.15 | Fail |
| Â | Â | Â | Â | Â |
| Â | Â | Â | Â | Â |
| Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor. | Â | Â | ||
| Â | 1. Sufficiently Strong Financial Condition | Current Ratio > 1.5 | 1.35 | Fail |
| Â | 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 2.71 | Fail |
| Â | 3. Earnings Stability | Positive EPS for 5 years prior | Â | Pass |
| Â | 4. Dividend Record | Currently Pays Dividend | Â | Pass |
| Â | 5. Earnings Growth | EPSmg greater than 5 years ago | Â | Pass |
Stage 2: Determination of intrinsic value
| EPSmg | $7.98 |
| MG Growth Estimate | 10.25% |
| MG Value | $231.48 |
| Opinion | Undervalued |
| MG Grade | C- |
| MG Value based on 3% Growth | $115.74 |
| MG Value based on 0% Growth | $67.85 |
| Market Implied Growth Rate | 3.27% |
| Current Price | $119.97 |
| % of Intrinsic Value | 51.83% |
Apple does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history and the high price-book (P/B) ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.74 in 2013 to an estimated $7.98 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 3.27% annual earnings growth over the next seven to 10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Apple revealed the company was trading above its Graham Number of $65.98. The company pays a dividend of $2.18 per share for a yield of 1.8%. Its PEmg (price over earnings per share) was 15.03, below the industry average of 28.12, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its net current asset value (NCAV) of $-15.74.
Apple receives an average overall rating in the ModernGraham grading system, scoring a C-.
Stage 3: Information for further research
| Net Current Asset Value (NCAV) | -$15.74 |
| Graham Number | $65.98 |
| PEmg | 15.03 |
| Current Ratio | 1.35 |
| P/B Ratio | 5.15 |
| Current Dividend | $2.18 |
| Dividend Yield | 1.82% |
| Number of Consecutive Years of Dividend Growth | 6 |
Useful links
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most recent balance sheet figures
| Balance Sheet Information | Sept. 1, 2016 |
| Total Current Assets | $106,869,000,000 |
| Total Current Liabilities | $79,006,000,000 |
| Long-Term Debt | $75,427,000,000 |
| Total Assets | $321,686,000,000 |
| Intangible Assets | $8,620,000,000 |
| Total Liabilities | $193,437,000,000 |
| Shares Outstanding (Diluted Average) | 5,500,281,000 |
Earnings per share history
| EPS History | Â |
| Next Fiscal Year Estimate | $8.05 |
| Sept. 2016 | $8.31 |
| Sept. 2015 | $9.22 |
| Sept. 2014 | $6.45 |
| Sept. 2013 | $5.68 |
| Sept. 2012 | $6.31 |
| Sept. 2011 | $3.95 |
| Sept. 2010 | $2.16 |
| Sept. 2009 | $1.30 |
| Sept. 2008 | 97 cents |
| Sept. 2007 | 56 cents |
| Sept. 2006 | 32 cents |
| Sept. 2005 | 22 cents |
| Sept. 2004 | 5 cents |
| Sept. 2003 | 1 cent |
| Sept. 2002 | 1 cent |
| Sept. 2001 | -1 cent |
| Sept. 2000 | 16 cents |
| Sept. 1999 | 13 cents |
| Sept. 1998 | 8 cents |
| Sept. 1997 | -30 cents |
Earnings per share - ModernGraham history
| EPSmg History | Â |
| Next Fiscal Year Estimate | $7.98 |
| Sept. 2016 | $7.70 |
| Sept. 2015 | $7.03 |
| Sept. 2014 | $5.60 |
| Sept. 2013 | $4.74 |
| Sept. 2012 | $3.83 |
| Sept. 2011 | $2.32 |
| Sept. 2010 | $1.36 |
| Sept. 2009 | 86 cents |
| Sept. 2008 | 57 cents |
| Sept. 2007 | 32 cents |
| Sept. 2006 | 18 cents |
| Sept. 2005 | 9 cents |
| Sept. 2004 | 3 cents |
| Sept. 2003 | 4 cents |
| Sept. 2002 | 6 cents |
| Sept. 2001 | 6 cents |
Recommended reading
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
Disclosure:Â The author held a long position in Apple Inc. (AAPL, Financial) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer. This article first appeared on ModernGraham.
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