Normally I would provide readers with analysis on one of the stocks included in our deep value Stock Screeners but today I thought I would provide analysis on one of the stocks that is not included in the screens to demonstrate why it’s overvalued. Today’s overvalued stock is Apple Inc. (NASDAQ:AAPL).
Apple Inc (Apple) is an American multinational technology company. It designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players.
A quick look at Apple’s share price history over the past twelve months shows that the price is up 44%, but here’s why the company remains overvalued.
The following data is from the company’s latest financial statements, dated June 2017.
The company’s latest balance sheet shows that Apple has $76.759 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $89.864 Billion in long-term debt and $18.475 Billion in short-term debt. Therefore, Apple has a net debt position of $31.580 Billion (debt minus cash).
If we consider that Apple currently has a market cap of $812.026 Billion, when we add the net debt totaling $31.580 Billion that equates to an Enterprise Value of $843.606 Billion.
If we move over to the company’s latest income statements we can see that Apple has $59.985 Billion in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 14, or 14 times operating earnings. With the average acquirer’s multiple in our Large Cap 1000 Stock Screener being 7.4 that places Apple squarely in overvalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Apple generated trailing twelve month operating cash flow of $64.068 Billion and had $12.833 Billion in Capex. That equates to $51.235 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of just 6%. The company has also spent $7.093 Billion (ttm) buying back shares and $3.365 Billion (ttm) on dividend distributions, providing shareholders with a shareholder yield of just 1%.
The company has done a great job in terms of its annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $134.082 Billion in equity for the quarter ending March 2017 and $132.425 Billion for the quarter ending June 2017. If we divide that number by two we get $133.253 Billion. If we consider that the company has $46.651 Billion (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 35%.
There is no question that Apple is at the top of its game with current revenues of $223.507 Billion (ttm) and net income of $46.651 Billion (ttm) at historical highs, as is the company’s book value per share of $25.64 (ttm). The issue however is the company’s current valuation. Apple is trading on a P/E of 17.8 compared to its 5Y average of 13.5**, a P/B of 6.1 compared to its 5Y average of 4.6**, and a P/S of 3.7 compared to its 5Y average of 3.1**. If we invert the P/E of 17.8 that means that Apple provides an earnings yield of 5.5%. The company has a FCF/EV Yield of 6% (ttm), a shareholder yield of 1% (ttm) and an Acquirer’s Multiple of 14, or 14 times operating earnings. All of which indicates that Apple is overvalued.
** Morningstar
About The All Investable Stock Screener (CAGR 25.9%)
Over a full sixteen-and-one-half year period from January 2, 1999 to July 26, 2016., the All Investable stock screener generated a total return of 5,705 percent, or a compound growth rate (CAGR) of 25.9 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 265 percent, or 5.7 percent compound.
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