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James Li
James Li
Articles (565)  | Author's Website |

Jan. 19 Forum Update: 'Apple and DCF' Edition

Key value investing forum updates since the new year

January 19, 2018 | About:

During the first three weeks of 2018, GuruFocus Value Investing Forum users shared discussions about Apple Inc. (NASDAQ:AAPL) and the discounted cash flow model.

Apple announces U.S. expansion

Apple announced in a Jan. 17 press release that it will contribute $350 billion to the U.S. economy over the next five years. CNBC's Sara Salinas mentioned in an article that Apple plans to create 20,000 new jobs across three campuses, including the two existing campuses in Cupertino, California and Austin, Texas.

Apple’s share price nearly exceeded $180 per share at market close Jan. 18, a new 10-year high. The Cupertino, California-based company trades approximately $30 higher than its median price-sales valuation.

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A recap of the DCF valuation model

The discounted cash flow model values companies based on a two-stage process: a growth stage and a terminal stage. According to a GuruFocus research article, we first start with a company’s earnings per share and then project the earnings 10 years at the 10-year compound annual growth rate of earnings. The chart below shows the earnings history for Ulta Beauty Inc. (NASDAQ:ULTA).

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Legendary investor Peter Lynch defines a fast grower as a company whose 10-year compound annual growth rate of earnings is at least 20%. Lynch also noted companies that grow earnings faster than 30% annually are risky bets as such high growth rates are usually unsustainable. Due to this, we cap the earnings growth rate to 20% in our discount cash flow (DCF) calculation. We also fix a discount rate of 12% and a terminal growth rate of 4%, the latter representing the growth rate in the 10 years following the growth stage.

GuruFocus provides a DCF Calculator illustrating the components of the calculation. The following screen shot shows a sample Calculator screen for Ulta.

See also

Other Forum posts from the past two weeks include the following:

  1. Why Apple keeps increasing its debt?
  2. Do you see any value in Salesforce.com Inc. (NYSE:CRM)?

We encourage our readers to continue contributing quality posts to our Forum so we can award the top post a free copy of "Invest like a Guru."

Disclosure: I do not have positions in the stocks mentioned.

About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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