Apple Inc (AAPL:NSQ) Analysis

Is it still necessary to introduce this computer giant, this wonderful American company that was practically forgotten in the mid-90s and revived by the return of its co-creator Steve Jobs. In 1996, a year before the return of its charismatic creator, the stock was trading at the equivalent of USD 0.58. Not long ago, it climbed to USD 232. Anyone who had the good idea to buy some for only USD 3,000 at the time and not touch it, before selling the whole thing last summer would be a millionaire. Even the famous investor Warren Buffett invested in Apple for his company Berkshire Hathaway, although he's not usually one to jump on tech companies. But AAPL stock has just taken a beating. It's down nearly $40% from its highs. So is now the time to buy?

Valuation & dividend

With the dramatic drop in the price, one would expect Apple to be a great opportunity. It is true that the price/recurring earnings ratio, at 11.13, is enticing. Even if we look at average recurring earnings, the ratio is 13.70, which is appreciable. From a free cash flow perspective, the stock is also trading at a very decent level, with a ratio of 10.60 to current FCF and 11.76 to average FCF.

However, when we look at the valuation relative to assets, it is already less attractive, since the price climbs to 6.34 times the book value. Compared to sales, we see the same phenomenon, with a ratio of 2.56. It should also be noted that EBIT and EBITDA represent 9.74% of the enterprise value, which tends to confirm that Apple is at best correctly valued, but in any case not a bargain, as the sharp fall of recent months might have led us to believe.

The dividend yield is not huge either, at 1.90%, but it is explained by an ultra-conservative distribution ratio, as is often the case in the tech sector. The dividend represents:

• 21.19% current recurring profits
• 26.08% average recurring profits
• 20.17% of current free cash flow
• 22.37% of average free cash flow

AAPL therefore has a certain margin to continue to increase its dividend in the future, as it has done every year over the past five years, at an average annual rate of 8.49%.

Balance sheet & result

Just like the dividend, profits, cash reserves and asset values are growing over the long term, which proves, if proof were needed, the solidity of Apple's business model. The company is clearly managing to create value for its shareholders over the long term, as we saw in the introduction. Well, at least it did until recently. The problem sometimes with this kind of technology is that it can miss a technological turn and fall very abruptly. It is very difficult to predict in which direction it will turn, as technological revolutions can move so quickly. Just remember what happened with Kodak when digital cameras appeared or with Palm when smartphones emerged.

That being said, the American giant is solid and has what it takes to see it through. Cash reserves are correct, with a current ratio (down) of 1.12 and a quick ratio of 1.09. The gross margin is good, with 38.3% (down), even if we could have expected more. On the other hand, it is difficult to be picky about the net margin of 22.98% and the free cash flow margin of 24.14%. Same story for profitability, with an ROA of 16.69% (a sharp increase), a CFROA of 21.17% and an ROE of 56.97%!

In terms of debt, Apple is also sailing in calm waters, since despite a long-term debt ratio to assets of 25,63% (decreasing), the company would be able to pay off all of its debt in just two years by using all of its free cash flow. Total debt represents 1.07 times equity, which is not ideal, but not worrying either.

Another good point for Apple is that its number of shares outstanding has been falling steadily for several years, which is always nice for shareholders who see their share of the pie increase.

Conclusion

AAPL is certainly a very good value. Margins and profitability are excellent, overheads are minimal, capital expenditure requirements are low and debt is kept under control. The company is very strong financially, which is confirmed by a Z-Score (Altman) of 3.3 and an F-Score (Piotroski) of 7.

In terms of valuation, despite the significant drop in the share price in recent months, Apple is currently just correctly valued if we don't stop at the traditional PER ratio. So there's no reason to panic and jump on it. Especially since history has already shown us many times that it's never good to try to catch a falling knife. This is all the more true since the stock's beta is 1.2, which means that it doesn't like bear markets too much, as we are currently experiencing. So I would wait a little longer...

In a few months we may have a really undervalued stock, with a price that will have stabilized and a market that will be doing better overall. The ideal scenario, finally, if we want to invest in tech stocks.