Friday, May 23, 2014

Waiting fatigue

In a previous post "Dangerous Times" I had mentioned the itch to do something prematurely. This is that time. I am getting the itch to do something and the market is not showing its cards. For the most part most of my portfolio is fully valued. By that I mean that most of the scripts that I hold are at DCF cost price for me and adding to them at this time with no change in fundamentals will simply increase by cost basis beyond the DCF value, taking me into an uncomfortable territory in terms of risk to capital.

I have seen this movie before. The market keeps treading water while everyone is itching to go either way. This is indeed the most dangerous time. The last time this happened was in 2006 when the market was at its highs but not really doing much more. I kept getting the itch to do something and kept adding to my portfolio. Finally when the market turned my cost basis was too high. So I shall try and suppress my itch for now.

Having said that MT is pulling back and that is one place I would like to add.  Maybe below 15 I will. Anyway, till then the market and I will play chicken to see who will blink first.

Wednesday, May 7, 2014

Apple by the numbers

This company always cracks me up. Not because of its absurdity but because of its sheer profitability. What is even more astounding about this company is it is a devices company that swims in the waters where other big fishes grapple with low margins and rapidly changing consumer tastes. But that discussion is for another day. Today let me see if I can make a case for Apple based simply on the backward looking fundamentals.

Apple (AAPL) by the numbers:

1. Cash : 155+ billion dollars (80% of it outside the US)
2. Debt : 16 + 12 billion dollars (raised for the sole purpose of buybacks and dividends)
3. Return on equity = ~30%
4. Accelerated buyback at lower levels - AAPL bought back 17 billion (close to 4%) around 520$
5. 44+ million iphones and 24+ million ipads in last quarter for an "aging" product line hitting almost two years.
6. A new level of shareholder friendliness with 35% increased buyback (buyback stand at close to 18% of float) and increased dividend that has a ridiculously low payout ratio of 10% of total cash flow.
7. A stock split that has not impact on the finance but should have a significant impact of sentiment given possible addition of the most valuable company to the Dow.

So whats not to like:
1. Possible attack on margins
2. An aging product line, that if not refreshed, might end up making the company irrelevant
3. A stock profile that might track other famous large caps through a period of stagnation as the company tries to protect its core market rather than disrupt and innovate.
4. The brain drain that has occurred in the last two years as the stock languished.

So what is it worth:
1. Lowest EPS estimate for next year: 41$
2. Cash on hand : 42$

Assuming a base P/E of 8 times (which would mean a 5 year horizon with compounded returns) and a 3-5% organic EPS growth through new product introductions along with and additional 3-5% positive impact of buybacks on the EPS, "Simplified DCF" projects an acceptable P/E of 10 times earnings.

That would bring us to 41*10 = 410$
Add back the cash = 410+42 = 452$

That indeed is my real intrinsic value for AAPL. If I were to think that the team in AAPL might have something up their sleeve for second half of this year (as indicated by Tim Cook) and on the off chance that it is a success (beyond the larger iphone) lets me go wild and add another point to the P/E (Equivalent to an addition 5% of EPS growth).

Then we have:
41*11 + 42 = 451+42 = 493$

So there you have it. 493$ is what I would call a safe place to initiate position or dollar cost average a lower cost position at this stage in AAPLs life.

Obviously the market is way ahead of the game and AAPL is at 592$.