Low Tech Blog

9 Mar 2005

I bought stock in Apple Computer, Inc. (AAPL) a few years ago when the company released the initial version of their Mach/FreeBSD based operating system, OS X. I thought that all of my fellow Microsoft loathing Unix friends would buy Macs for their circle of free tech support family members (which is exactly what I've done -- I converted my wife when I bought the stock, and I will have the last hold out, my mother-in-law, using one of the Mac Mini's by the end of the month.)

I ended up selling the stock a year ago, making about $10/share. I thought the iPod was winding down and that most of the OS X converts were converted. I also didn't really understand how to value a stock, and it's the subsequent $55/share (pre split) that I gave up that made me decide to learn how to estimate a value for a stock. After getting my feet wet with an attempt to value SCOXE, I thought I'd try my hand at computing an intrinsic value for AAPL based on the same Free Cash Flow to the Firm model from the book Streetsmart Guide to Valuing a Stock by Gray, Custasis and Woolridge. Here's what I came up with.

Assumptions		Comment
Revenue	9,763,000	As reported for the last 4 Quarters
Revenue Growth	26.61%	Annual Compounded Rate from 2002 to Q105
Net Operating Profit Margin	3.14%	Total NOPM from FY2002 to Q105
Tax Rate	35%	Assuming maximum corporate rate
Share Price	$39.35	Close on 9 Mar 2005
Shares Outstanding	817,170	As reported on Yahoo! Finance
Investment Rate	1.95%	As reported for the last 4 Quarters
Working Capital (as a % of Revenue)	-16.93%	Mean rate for FY2002-FY2004
Depreciation Rate	1.62%	As reported for the last 4 Quarters
Beta	1.833	As reported by Yahoo! Finance
Short Term Assets	8,322,000	As reported for Q105
Short Term Liabilities	9,362,000	As reported for Q105
Long Term Debt	0	As reported for Q105

Now I believe Apple is on the rise, and I expect that they'll be able to leverage their reputation for quality and design for a the foreseeable future. So I expect a 10 Year Excess Return Period, based on my reading of the situation and of my understanding of the 1-5-7-10 RULE.

Here is how I value AAPL, given my understanding of the ValuePro model:

	Year 1	Year 5	Year 7	Year 10
Estimated Revenue	12,360,518	31,757,783	50,904,589	103,303,984
Estimated Net Operating Profit	388,253	997,536	1,598,951	3,244,855
Estimated Taxes	135,889	349,137	559,663	1,135,699
Estimated Net Operating Profit After Taxes	252,364	648,398	1,039,318	2,109,156
Change in Investment	40,514	104,092	166,849	338,598
Estimated Working Capital	-439,704	-1,129,729	-1,810,844	-3,674,864
Free Cash Flow to the Firm	651,555	1,674,035	2,683,313	5,445,422
Discounted FCFF	595,033	1,063,442	1,421,675	2,197,506

Period of Excess Return	1 Year	5 Year	7 Year	10 Year
Residual Value	2,656,748	6,825,962	10,941,343	22,203,976
Discounted Residual Value	2,426,276	4,336,238	5,796,950	8,960,438
Corporate Value	11,343,309	16,719,935	20,831,902	29,737,258
Value to Common	8,119,309	13,495,935	17,607,902	26,513,258
Estimated Share Price	$9.94	$16.52	$21.55	$32.45

So, I estimate the current value of the stock to be $32.45. Given the current price of $39.50, I probably won't be buying AAPL anytime soon. In fact, if I held it such that any capital gains would be taxed as long term, I would consider selling it. But given my history on this stock, I'm a bit gun shy on selling -- I'd probably just hold.

You can find the spreadsheet with my calculations here. If you don't have OpenOffice.org, you can get it for free here.

References

http://www.valuepro.net/ with whom I am in no way affiliated.

Yahoo! Finance AAPL Summary Page