An Educational Look at Apple (AAPL)

henry
Is Apple a stock worth buying? Other people have discussed (at length) its "questionable" product decisions

Analyzing Apple

An Apple by itself

Is Apple a stock worth buying? Other people have discussed (at length) its “questionable” product decisions, such as:

  • The touch bar
  • getting rid of Touch Id in favor of using facial recognition
  • Scrapping a whole ecosystem of connectors to push the “Lightning cable”
  • Eliminating the headphone jack from the newest generation of phones.

Beyond those product decisions, how does Apple, the company, perform from a quantitative point of view? What do the financials illustrate, and what should investors’ next course of action be??

To do this effectively the company must be broken up into four individual parts:

  1. Income statement – Earnings, to profit margins, revenue, expenses, etc
  2. Balance sheet – Does it have too many liabilities? Does it look like its spending money sensibly, or is something odd going on?
  3. Growth – Is Apple growing as fast as it used to? Are cash flows growing as fast as profits?
  4. Financial safety – Does the company have a good Piotroski and Beneish score? (Is Apple cooking the books and entirely safe from the possibility of bankruptcy in the future?)

An Apple changing over time

Income statement

 

An abbreviated income statement shows that revenue was growing until about two years ago where it began to plateau. Net Income is doing the same thing. Does this persist over the long haul?

 

 

How odd. Apparently this plateau effect has been seen before – from 2012 to 2015. Growth was steady before that, but it now happens inconsistently. Are profit margins holding up?

 

 

Apparently not. Profit margins were south of 15% in 2007-2008, spiked to nearly 30% for 2010 and 2011, and have been drifting back down ever since.

 

Balance Sheet

 

$200 billion in liabilities? That seems like a lot, but the market cap is more than three times that. The assets will put things into perspective.

 

 

How have the liabilities been growing versus the assets over time?

 

 

Apparently the liabilities are growing faster. What about goodwill and other intangibles? If they grow too quickly, they can signal a failed roll-up strategy, or other trouble.

 

 

Intangibles as a share of assets reached their peak in 2012, and never amounted to more than three percent. Compared to Computer Associates (CA), at 65% of their assets being intangible, Apple looks clean.

 

Piotroski, Beneish and Ohlson and more

 

Score wise, Apple looks mediocre. It’s Piotroski score is middle of the road, it’s Montier C Score is 3, which seems only OK, and its Beneish score is a little too high. At least the Ohlson O score is small. Looking at Apple versus itself, it definitely seems mediocre.

 

 

Looking at the relationship of P/E to price, they have been recently tied together almost in lockstep. There is also hard ceiling that’s definitely less than 20. So, either earnings are going to go up, or price is going to come down.

 

Looking at the rank of Apple’s closing price versus the last one year, when it’s near 100, the stock is making a steady advance. Looking at the right edge of the graph, there are minor deviations from that steady advance pattern, which cause a bit of concern, but no alarm.

Apple as part of the market

So, what does this illustrate? A screen that characterizes Apple can quickly be constructed; given what has been found (the following items must be true):

  1. Beneish score between -2 and -3
  2. Montier C Score of 2,3, or 4
  3. Profit margin between 15% and 25%
  4. Liabilities to assets at less than 70%, but getting worse each year over the last three years. We exclude companies that four years ago had less than 30% liabilities to assets, so we don’t get too excited by a large change in a small number, though this exclusion makes little difference in practice.

 

When the screen is run, blue chip stalwarts are returned.

This is interesting, especially since we have no size restrictions in our criteria above. Is this isolated to only large companies do?

What happens over time?

The last 5 years aren’t pretty (rebalancing quarterly):

This could indicative of a worrisome future for Apple.

About henry

Henry Crutcher is an avid family guy, board gamer (think Settlers of Catan, Puerto Rico, etc), computer nut, and all around geek. Hailing from Louisville, KY, he has noticed that the weather in Louisville is remarkably similar to the weather in Atlanta, GA despite the 407 miles that separate them. He has two daughters, one cat, and lots of trees. He loves the Miles Vorkosigan series from Lois McMaster Bujold, for its mix of SF, comedy and insight into how people work. He also comsumes more than his fair share of cheesy business/economics books, such as The Ascent of Money by Niall Ferguson, or Farewell to Alms, by Gregory Clark.

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