Monday, October 17, 2022

Fiscal 4Q 2022 Final Estimates

As of today's closing price of $142.41, AAPL trades at a 20.0x multiple on my NTM EPS estimate (19.5x when excluding NTM net cash and dividends).

Lowered the long-term (beyond FY23) revenue growth rate by another point or so, now at mid single-digits, yielding mid-high single-digits in long-term EPS growth. New revenue streams won't move the needle for the next 2y and will provide very low visibility of the growth potential even after 3-5y, though the stock price should begin to reflect whatever investors dream up of such long-term potential as soon as we get any announcement, and likely even earlier.

In the short term, I trimmed 4Q22/FY23 revenue and EPS by $2/4b and 7/5¢ respectively, mostly due to FX. During uncertain times ahead Apple could easily decide to emphasize cash conservation but instead I'm going with a more deliberately opportunistic approach, given the attractive share price, by modeling at least $80b of the $86b remaining buyback authorization over the three quarters ending 2Q23 (totaling over $100b for the year and keeping it there for the next 3 years), as well as a dividend increase for next year comparable to the one done in 2018 (+16%) rather than the single-digits raise seen in the last 3 years. I doubt the 14-week Q1 has been considered much in consensus estimates. This represents 4-8% upside and perhaps explains some/most of my divergence for Q1.

Detailed estimates:

3mo ending Sep22  Rev$B   GM%  $EPS
----------------  -----  ----  ----
Analysts consens   88.9     -  1.27
My estimates       90.1  42.5  1.35 (16.14b shares)

3mo ending Dec22  Rev$B   GM%  $EPS
----------------  -----  ----  ----
Analysts consens  128.4     -  2.14
Apple gde lo (e)  130.0  42.0  2.27*
Apple gde hi (e)  137.0  43.0  2.39*
My estimates      137.8  42.9  2.42 (15.97b shares)

*EPS guidance ranges derived from other figures provided
 by Apple and diluted shares outstanding estimated by me

12m ending Sep23  Rev$B  $EPS
----------------  -----  ----
Analysts consens  411.9  6.44
My estimates      431.4  7.12

Timeframe  NTMfrom  $EPS  Y/Y  Mult  Val   $*   Div  Tot
---------  -------  ----  ---  ----  ---  ---  ----  ---
Trail Val  Oct2021  6.17  10%  21.5  133  3.0  0.90  136
Frwrd Val  Oct2022  7.12  15%  23.2  165  2.5  1.00  169
1y Target  Oct2023  7.61   7%  23.8  181  1.8  1.14  184
2y Value!  Oct2024  8.17   7%  23.9  196  1.1  1.28  198

*Cash per share balance net of debt and commercial paper

(click to enlarge)

F4Q22 Statements of Operations Revenues F4Q22e F4Q21 Y/Y% -------- ------- ------- ----- iPhone 43,593 38,868 12.2 Mac 9,997 9,178 8.9 iPad 7,926 8,252 -4.0 W/H/A 9,444 8,785 7.5 -------- ------- ------- ----- Products 70,959 65,083 9.0 Services 20,133 18,277 10.2 -------- ------- ------- ----- Tot Revs 91,092 83,360 9.3 Gross Margin Breakdown -------- ------- ------- ----- Products 24,289 22,293 9.0 Services 14,437 12,881 12.1 -------- ------- ------- ----- Tot GM 38,726 35,174 10.1 -------- ------- ------- ----- Prod GM% 34.2% 34.3% -0.0 Svcs GM% 71.7% 70.5% 1.2 -------- ------- ------- ----- Tot GM% 42.5% 42.2% 0.3 Op Expns 12,970 11,388 13.9 -------- ------- ------- ----- OpIncome 25,756 23,786 8.3 Op Mrgn% 28.3% 28.5% -0.3 OIE 200 -538 N/A -------- ------- ------- ----- Pre-Tax 25,956 23,248 11.7 Tax Rate 16.0% 11.6% 4.4 Tax Prov 4,153 2,697 54.0 -------- ------- ------- ----- Net Incm 21,803 20,551 6.1 Net Mrg% 23.9% 24.7% -0.7 Dil Shrs 16,142 16,635 -3.0 -------- ------- ------- ----- EPS $1.35 $1.24 9.3 Amounts in millions except EPS in dollars and ratios in %



Anon said...

Thanks. Can you share some color on the 16% increase to the dividend? The taxing of buybacks?

Divident increases:
2012: $0.38 per share (Initiated div)
2013: $0.44 (15% increase)
2014: $0.47 (8% increase)
2015: $0.52 (11% increase)
2016: $0.57 (10% increase)
2017: $0.63 (11% increase)
2018: $0.73 (16% increase)
2019 (5% increase)
2020 (6% increase $0.82)
2021 (7% increase $0.88)
2022 (5% increase $0.92)

Average 0.10

Daniel Tello said...

Hi Anon, thanks for the question and data recap. It’s also insightful to look at the historic trends in payout ratio to earnings, and of course the yield. Both of these have declined to almost symbolic levels. Even though as a growth-seeking investor I still prefer the buybacks, I recognize there’s also income needs for many others, and more so recently and in the near future with rising interest rates. The 1% tax on buybacks next year is not a big factor, at least until the share price eventually gets closer to intrinsic value. Even with a 17% raise next year and around 12% in following years that I’m modeling, the dividend would remain the smaller fraction of the huge capital return program, with the bulk destined for buybacks, which I expect will continue to increase in pace with earnings, and of course given management has reiterated with their “net cash zero over time” stated goal.

Anon said...

Thank you. 🤞that tomorrow disclose to your expectations, and that the forward looking commentary is positive. I expect it to be, relative to the challenges they've faced.

Anon said...

Well done! Again.

Sacto Joe said...

Hi, Daniel,

I'm taking a hiatus from for the nonce, and happened upon your site by accident just now. I can't help but look at your last posting and remark on how prescient it was!

"The recent market price dip to low-20s multiple offers the now rare opportunity of an average quarterly price below my "fair" (or forward) valuation level..."

And at today's 52 week low close, even more so. We're on fixed income, and so can't join in the opportunity directly. Indirectly is another matter. All our AAPL shares (we're 100% AAPL, and have been for almost all of our ~15 years of retirement) were purchased before the Great Recession hit. And with a decade of buybacks under Apple's belt, I've seen how profound this condensation of stock shares has been on those who stick with AAPL through thick and thin.

We're approaching 40% buyback, and of course that represents a (100/60= ) 166.6% increase in our "ownership" of an Apple Inc which has not been sitting on its laurels over that decade. Cash flow shows every sign of continuing to grow. Very soon (and sooner because of these low prices), Apple will hit net cash zero (cash=debt), and the "buyback tap" will be closed. The cash flow tsunami will then have to go somewhere, and the likeliest candidate is dividends. On a ROI basis, having bought into AAPL with a cost basis that was already low, and then to see on top of that a 2/3 increase in ROI due to buybacks increasing our remaining share of the EPS spigot, that will be a wonder to behold.

I've been trying to clue Apple 3.0 people in on what's heading down the pike for those that have held AAPL over the last several years, and while some get it, others have just closed their ears. But I think they're smart enough even so to hold onto their shares long enough to see Apple's long term plan for its long term investors come to fruition, so they'll see the reward even though they won't understand where it came from.

In the meantime, we saw the big pullback coming, and moved more than normal living expense requirements into cash, so we've not been selling at all for almost the whole year. With any luck at all, we'll be able to hang in there for the next few months as well, while this dumb old market figures out that Apple is going to be coming out of all of this smelling like the proverbial rose.

China is an issue, of course. But China is, IMHO, between a rock and a hard place concerning Apple. They can't afford to have them leave. IMHO, it's not a coincidence that their Covid stupidity came apart when it started to impact Apple production. And if they're really smart, they'll let Apple vaccinate all its direct and indirect employees with decent American-made vaccines, and work to protect those Apple workplaces like they were their seed-corn - which in a very real way they are.

Well, time to get back to some real work! Again, congrats on the long term vision!

Joe Bland, aka Sacto Joe

Daniel Tello said...

Hi Joe, Happy New Year! Glad you accidentally stumbled upon here.

As of last September the buybacks have retired 42.6% of the shares that would be outstanding today had Apple not bought and retired them. This includes a few to offset shares issued as employee compensation, and your ownership is now 165% (or an increase of 65%) of the shares you had (and held) since the end of 2012, compared to just under 92% (or 8% dilution) without the buybacks, so the actual benefit is 180% (165/92) or an 80% increase in ownership.

The motivation for doing buybacks (tax efficient way to return capital to shareholders) does not disappear once they reach net cash zero. Apple will continue to generate excess cash in droves, so no, the “buyback tap” would not be closed. I expect over $100b in annual buybacks even after net cash zero, and should continue to grow perhaps slightly below free cash flow growth to allow for dividends to grow slightly more.

Each investor is free to sell a fraction or all of that additional ownership as they see fit, according to their individual assessment of whether the market price at any given time sufficiently reflects their target valuation for their shares, aligned with their tax planning and timing preferences, and to fund any income needs they may require after paying capital gains tax, if any. Those in non-taxable accounts who choose to reinvest their dividends are not penalized at all (the buybacks are mathematically equivalent to a tax-free reinvestment of dividends), and those on taxable accounts reduce and defer their tax liability on their investment income.

Agree about the China issues. Check out my blurb back in April (here ) about manufacturing diversification which many months later became the favorite topic of every analyst and pundit. Last quarter will be affected but the immediate issues are now mostly resolved. The long-term, strategic diversification will take several years, and the goal is not to leave China, but to have alternatives.

Best wishes in this new year. Cheers! 🥂🍾

Joe Bland, aka Sacto Joe said...

Hi, Daniel,

Thanks for the very welcome reply!

I’ve started thinking of buybacks in terms of ROI from date of share purchase. If there had been no buybacks, then the only way EPS could grow is via an increase in net income/net earnings. But with buybacks, the EPS “grows” since the share count shrinks, and the remaining “pie slices” get bigger (stock splits just cut each slice into smaller slices). I also think of a “slice” as a single original share of stock, pre-split.

Bottom line: The ROI on a share bought prior to buybacks is synonymous with the price paid per “slice” prior to buybacks. Yes, you can buy the equivalent of one of those slices today, but while you would also receive today’s EPS, the “cost of investment” (COI?) is much, much smaller for those of us who bought in pre-buyback.

As regards buybacks once net cash zero is reached, it also is a “moving target”. I think it’s a fair bet that Apple debt is going to stop growing and even reverse, as the cost of borrowing has gone up dramatically, and shows little indication of returning to the much lower costs seen during the pandemic and earlier. Also, the amount of net cash going towards stock options looks to stay pretty steady. That continual decrease in debt load (as it’s paid off), plus any increase in cash flow (which I expect), means maintaining net cash zero will require off-loading an ever-increasing amount of cash on a continual basis.

IOW, since the requirement to dump excess cash - or alternatively to increase debt - will decrease upon reaching net zero cash, then after that point cash would begin to “pile up”. That’s the reason I expect dividends to increase: Apple’s going to be inundated by piling up cash flow.

I might add that I fully expect a lot of pressure to be applied to Apple to increase the percentage of cash flow going to dividends. There are two reasons for that: First, a lot of investors like that steady chunk of cash dumping into their accounts, and they’re going to be pushing for it to grow. Second, a lot of those same investors have NO IDEA how it is that buybacks advantage them. They understand cash in their pocket. They are very, very hazy on the long term benefits of buybacks.

I have seen this last verified in no uncertain terms on Apple 3.0. It’s understandable, of course; it’s taken me a lot of time and thought to “get” how the benefit works. But it’s just not intuitively obvious, so folks don’t “trust” it.

I hope you’re right, though. I much prefer buybacks to dividends, especially at the present level of valuation. Also, I don’t expect that valuation to change soon; too many people are making too much money off of keeping AAPL undervalued, even now.

May you have a wonderful 2023!