As of yesterday's market close of $174.22, AAPL is trading at a 14.1x multiple on my next-twelve-months EPS estimate (11.7x when excluding next-12m net cash and div).
On tax reform effects, Apple seems to have provisioned past foreign taxes very presciently as the $38b it announced will pay (presumed over 5 years though regulations allow it over 8 years) is very much in line with the foreign tax deferred liability they would have as of December (was $36b as of September). On the going-forward effective rate, I'm modeling a gradual decline from 22% (current quarter) to about 20% in a year, but I can see it going down to 18% depending on many particularly complex details of the new tax treatment for foreign income.
As for what to do with all the freed-up cash, other than increased R&D and capital spending (mostly already in my model) I'm going with a dividend per share increase of 16% next April and about 20% per year for the following 3 years (raised it 10.5% last year) essentially doubling the current per share amount by 2021 and achieving a 2% yield on my stock price projection. In addition, I model a $110b increase ($35b base annual increase and $75b due to tax reform) to the share repurchase program to a total of $320b through March 2020 (was $210b through March 2019). Assuming my stock price forecast isn't too far off from reality, this would reduce the shares outstanding after the next 3 years to about 4.3b shares, and would limit the incremental total dividend cost to Apple to only about $5b over 3 years (ttm cost is $12.8b).
On iPhone cycle and all the other products business, seems my experiment last September of taking a shot at it well before it all went down was rather succesful, as my guesses were pretty good, particularly guidance. So no major changes to the fundamental business basis for the model other than another bump to ASPs. Be prepared to see many pundits dismissing all of 2018 positives as mere financial engineering, and an intensification of the already schizophrenic negativity for the next cycle.
Detailed estimates:
3mo ending Dec-2017 Rev($M) GM(%) EPS($) ------------------- ------- ----- ------ Analysts consensus 86,750 - 3.80 Apple guide low 84,000 38.0 3.61* Apple guide high 87,000 38.5 3.82* My estimates 87,358 38.8 3.98 (5.14b shares) 3mo ending Mar-2018 Rev($M) GM(%) EPS($) ------------------- ------- ----- ------ Analysts consensus 67,677 - 2.90 Apple guide low (e) 62,000 38.0 2.59* Apple guide high(e) 64,000 39.0 2.79* My estimates 64,232 39.1 2.82 (5.08b shares) *EPS guidance ranges derived from other figures provided by Apple and diluted shares outstanding estimated by me 12m ending Sep-2018 Rev($M) EPS($) ------------------- ------- ------ Analysts consensus 273,147 11.49 My estimates 266,117 11.65 Valuation (fwd-12mo from) EPS($) Y/Y 10x Cash* Div Tot ------------------------- ------ ---- --- ---- ---- --- Trailing (Jan-2017) 9.81 17% 98 31 2.46 132 Fair Value (Jan-2018) 12.36 26% 124 27 2.82 154 1yr Target (Jan-2019) 13.86 12% 139 29 3.37 171 * Cash per share balance net of long-term debt(click to enlarge)F1Q18 Revenue breakdown: iPhone 60,334 (83.0 × $727) iPad 6,190 (14.0 × $442) Mac 7,262 ( 5.5 × $1,320) Services 8,419 Other 5,152 ( 7.5 × $385 = 2,884 Watch) Income statement: Revenue 87,358 COGS (53,501) GM 33,856 38.8% OpEx (7,739) OpInc 26,117 29.9% OIE 624 Pre-tax 26,741 Tax (6,284) 23.5% NetInc 20,457 23.4% Shares 5,138 EPS $3.98 (amounts in millions except $ASP, $EPS, and ratios%)
Posts
6 comments:
I always look forward to your analysis. Thank you!
"…going with a dividend per share increase of 16% next April and about 20% per year for the following 3 years (raised it 10.5% last year) essentially doubling the current per share amount by 2021 and achieving a 2% yield on my stock price projection."
Q: I can probably step through the math to see what a 2021 share price with this $x.xx dividend yield = 2%, but can you share the math you've already done?
"In addition, I model a $110b increase ($35b base annual increase and $75b due to tax reform)."
Q: Is this the same as saying "and $75b due to repatriation of previously overseas cash"? With the improved profitability showing in the base?
Valuation (fwd-12mo from) EPS($) Y/Y 10x Cash* Div Tot
------------------------- ------ ---- --- ---- ---- ---
Trailing (Jan-2017) 9.81 17% 98 31 2.46 132
Fair Value (Jan-2018) 12.36 26% 124 27 2.82 154
1yr Target (Jan-2019) 13.86 12% 139 29 3.37 171
* Cash per share balance net of long-term debt
Q: How much cash do you think Apple wants to keep as dry powder, through say Jan 2021? My guess is that they'll want to keep $75b-$90b at hand, at least for a for a while, to see how it helps them in discussions with potential partners/suppliers. (What I don't have a thought on yet, is whether "on hand" includes a cash balance equal to long-term debt, or whether its net cash.)
My hope is that Services recurrent revenue keeps growing, maybe helped along with a few acquisitions, so that sentiment yields a higher P/E. That paired with a transparent and predictable Capital Return Program (or "financial engineering") should help. I'm hoping for some downside share price stability.
Eventually I'll see someone's blended calculation of an assigned P/E to the growth portion of AAPL, and a separate P/E to that of a Utility (value). https://www.yardeni.com/pub/mktbriefsppesecind.pdf
Thanks again.
"ono"
Hi ono. Good questions but I’m not too fond of going into so much detail when looking 4 years forward. I think the rough comments I made should suffice for now but I’ll give you some color on them.
Indeed, you can easily do the math on the roughly 2x current dividend and 2% yield, but please realize that projection has a wide cone of uncertainty. Keep in mind the dividends pull down on the future stock price projection as they get distributed. My methodology of adding back the fwd-1y worth of dividends only prices it into the fair value (FV) when standing 1y before but not farther back. The purpose of that is to model the stock’s market price at that point in time regardless of prior distributions, just as the market does. In other words, if the model spits out, say, $225 some time in 2021, you’d have to add back all 4 years worth of dividends to get the value of it today (and then perhaps discount it to the present). I’ll leave that up to you.
The $35b base buyback increase is my feel for the past (slightly declining) trend of annual buyback additions, i.e. without the benefits of tax reform both repat of past profit and future profit. The $75b + incremental divs above ~10% growth is all thanks to tax reform, and possibly conservative. I’d say about $50b would be a possible level of base annual increases to the authorized buyback program beyond next year, but we’ll have to wait and see where we stand after a year or two and beyond.
I’m modeling roughly flat net cash per share (with a slight dip and rebound next 12-24mo or so to help fund all this cash return), and given the share reduction I mentioned you can get a sense of the total amount of net cash I’m modeling 3-4y down the line (just multiply both figures). The debt level is irrelevant in my model (it’s all net cash as mentioned) but I’d prefer it gets paid off, at least as it matures or hopefully a bit faster as it’s no longer needed.
I tend to agree with your comments on services helping with valuation, but those arguments require a patience rarely found in the market. In the short term it’s very hard for services to edge ahead of iPhone rev growth given the higher ASPs this year. I do think it did help expand the P/E during last year as management kindled that narrative. If iPhone holds its ground in 2019 then services can help, but at the mere hint of an iPhone decline (ASPs will be tough to maintain) it’d take another year or more after that, until it stabilizes and investors can then begin to shake off their iPhone growth dependency syndrome.
Hope this helped, and thanks for reading.
Hi Daniel - your blog is one of the most important piece of information that I gather before going into the earnings season - I value it much more than any analysts'!
Glad to see you start to do forward predication as well - this is now even better than what I was expecting! In any case, I do have one question though: how do you come up with the Apple's March Quarter rev range ($62b - $64b)? I understand it's an estimate but where in their 10Q/10K do you even get a sense where Apple thinks how they will do in Q2?
Thanks for the kind words Anon, very happy to see my work is valued so much.
I’ve always made forward predictions at least 3 years in advance, always published my valuation table which looks 2y forward, and a few times I’ve shared projections going 5-6y into the future. This is nowhere in any of Apple’s 10Q/10K filings of course, or anywhere else. Is just a lot of analysis on my spreadsheet informed by all the financial history since 2001, looking at patterns, various variable relationships, trends, hypothesis, crazy formulas, and hunches about where things might be going.
The guidance I estimate Apple will give is based on my estimated number for Q2 which usually marks the high end of the range and I pick a lower range that reflects the way Apple has given guidance in the past: $2-3b range for revs, 0,5-1% range for GM, etc. Nothing magic about it, just my most educated guesses.
Hope that explains it. Thanks again!
Got it. However I must say I am disappointed that you couldn't actually read Apple management's mind when it comes CQ+1 #s. ;)
Keep up the good work!
Thanks for your detailed and thoughtful reply. I've come down with the dreaded flu, hard, so I'll have to read this weekend.
Ono
Post a Comment