22 July 2009

AAPL: Gauge Scores for the June 2009 Quarter

In a recent post, we examined Apple's (NASDAQ: AAPL) Income Statement for the quarter that ended 27 June 2009.  Surpassing most predictions, Apple's earnings increased from $1.19 to $1.35 per diluted share. 

We have since used Apple's latest financial statements to update the ratios and other metrics with which we assess Cash Management, Growth, Profitability and Value.  This post reports on our analysis results, including the Financial Gauge scores.

In summary, Apple's GCFR gauge scores are as follows:

  • Overall: 48 of 100 (down from 60)

The rest of this post reviews the financial metrics that determine the gauge scores.

Cash ManagementJun 2009Mar 2009Jun 20085-Yr Avg
Current Ratio2.
Debt/CFO (years)
Inventory/CGS (days)
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)22.619.117.921.7
Working Capital/Invested Capital (*)
Cash Conversion Cycle Time (days)-40.2-43.3-40.0-42.9
Gauge Score (0 to 25)13141716
* For Apple we use Shareholder's Equity instead of Invested Capital

Apple's strong Balance Sheet features zero debt and $24 billion in Cash and Short-term InvestmentsCurrent Liabilities have leaped substantially, which reduces the Current Ratio shown above.  However, Deferred Revenue is responsible for the lion's share of additional liabilities, and this is due to the subscription accounting -- explained clearly by Andy Zaky at Bullish Cross -- used by Apple for sales of the iPhone and some other products. 

The days of Inventory held, which is amazingly low, has inched up a little.

There are a few ways to calculate Invested Capital, and the equation we use is:

    Invested Capital = Shareholders' Equity + Debt - Cash - Short-Term Investments

In many recent quarters, this equation has produces a negative number for Apple, although it is now modestly positive.  To avoid this difficulty, we substitute Equity for Invested Capital.  Changes from quarter to quarter are more important to us than the absolute figure for Capital, but we would be interested to learn how others calculate Apple's Invested Capital.

Although the concept of negative days in the Cash Conversion Cycle Time might be a little troubling, we accept it with the belief that lower numbers (or more negative numbers) cannot help but indicate better cash management efficiency.

GrowthJun 2009Mar 2009Jun 20085-Yr Avg
Revenue growth12.2%17.2%36.1%29.8%
Operating Profit growth46.3%48.1%71.8%59.3%
CFO growth62.1%50.6%44.9%71.5%
Net Income growth12.5%15.4%46.8%62.5%
Gauge Score (0 to 25)10111416
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in
Operating Profit after Taxes over the last 16 quarters.

While Apple's growth rates have started to moderate from last year's red-hot pace, they remain impressive -- especially so given current economic conditions.  Apple's focus on the consumer has paid dividends, and IT spending by businesses has been weaker.

ProfitabilityJun 2009Mar 2009Jun 20085-Yr Avg
Operating Expenses/Revenue80.0%80.3%80.9%84.0%
ROIC (*)
Free Cash Flow/Invested Capital (*)
Accrual Ratio19.7%23.8%10.7%9.9%
Gauge Score (0 to 25)13131816
* For Apple we use Shareholder's Equity instead of Invested Capital

We're impressed with Apple's success at keeping its costs down and margin high.  The returns (income and cash flow) on Equity are superb.  The Accrual Ratio is oddly high, which would ordinarily raise a concern about earnings quality.  However, this appears to be an artifact of the a change, put into effect during the December 2008 quarter, in how the company accounts for fixed income securities.

ValueJun 2009Mar 2009Jun 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)9.36.718.616.0
Gauge Score (0 to 25)111838

Apple's share price skyrocketed from $105 to $142 during the second quarter of 2009, and this increase put a lot of downward pressure on the Value gauge.  However, the company's fine operating performance kept the score from declining further.  When compared to the last five years, some figures suggest the company's shares have become less expensive.

OverallJun 2009Mar 2009Jun 20085-Yr Avg
Gauge Score (0 to 100)48604652

This is the first GCFR gauge analysis of Apple.  The company's results in the June quarter did not have much of an effect on three of the four category gauges.  The Value gauge, however, sagged in response to the soaring price of Apple's common shares.  The drop in this gauge, which is double-weighted, was responsible for most of the Overall Gauge's decline.

If the shares were undervalued earlier in the year, which would seem to have been the case given the healthy (but retroactive) 60-point score and the subsequent Spring rally, our gauges are signaling that the shares are less undervalued even after the better-than-expected quarter.

Full disclosure: No position in AAPL at time of writing.

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