09 February 2010

AAPL: Financial Gauge Analysis for the December 2009 Quarter

Apple (NASDAQ: AAPL) earned $3.67 per diluted share in the quarter that ended 26 December 2009, which was the first quarter of the company's fiscal 2010.  Earnings increased from a restated $2.50 per share in the first quarter of fiscal 2009.

This post provides updated Cash Management, Growth, Profitability and Value metrics and our financial gauge scores for Apple.  The metrics were calculated using data in Apple's most recent 10-Q, the company's earlier financial reports, and its restated financial statements for the last three fiscal years.

We have already examined Apple's Income Statement for the December 2009 quarter.

Apple Inc. sells Macintosh® desktop and laptop computers, iPod® music and video players, the iPhone™ portable communications devices, the OS X operating system, iLife and iWork application software, and various accessories.  The imminent addition of a tablet computer to the product line has triggered an avalanche of speculation and valuable publicity for this company known for elegant product design, innovation, the loyalty of its customers, and the cult-like status afforded CEO (and savior) Steve Jobs

In the December 2009 quarter, Apple retrospectively adopted new accounting standards that allow "substantially all" revenue and costs related to the iPhone and Apple TV products to be recognized when these items are sold to a consumer.  Apple had previously followed the "subscription accounting" method that distributed Revenue recognition over each product's two-year estimated economic life.

Additional background information about Apple and the business environment in which it is currently operating can be found in the beginning of the look-ahead.

Apple's latest quarterly results produced the following changes to the gauge scores:

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.  Please note tha these metrics were calculated using the company's restated financial statements for the last three fiscal years.

Cash Management26 Dec 200926 Sep 200927 Dec 20085-Yr Avg
Current Ratio2.
Debt/CFO (years)
Inventory/CGS (days)
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)20.721.418.320.1
Working Capital/Revenue44.6%47.8%46.9%42.3%
Cash Conversion Cycle Time (days)-41.1-43.0-44.6-42.0
Gauge Score (0 to 25)20181617

Apple's strong Balance Sheet features zero debt, $24.8 billion in Cash and Short-term Investments, and $15.0 billion in Long-term Marketable Securities.  The Current Ratio is comfortably high but not excessive.

The days of Inventory held, relative to the Cost of Goods Sold, is amazingly low and getting lower.  We believe this is indicative of the efficiency of Apple's business model in which contract manufacturers build the sub-assemblies the comprise Apple's hardware products, integrate the sub-assemblies, and test the resulting finished products.

Good cash management efficiency is also seen in the relatively low number of Days of Sales Outstanding and the Cash Conversion Cycle Time.  While low Cycle Times signify efficient use of cash, we're not sure of the utility of this metric when the cycle time is significantly negative.

Growth26 Dec 200926 Sep 200927 Dec 20085-Yr Avg
Revenue growth19.9%14.4%39.6%31.3%
Operating Profit growth68.3%69.9%68.0%63.4%
CFO growth11.7%5.9%66.8%72.3%
Net Income growth39.0%34.6%63.3%58.1%
Gauge Score (0 to 25)1091316
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.

Apple has been growing robustly for a few years now.  The rates of growth for Revenue, Net Income, etc., are very impressive, but the Growth score is pedestrian because the rates are lower than they were a year ago and the gauge rewards acceleration.  The earlier rates were not sustainable.

In addition, the Revenue-to-Assets ratio has fallen, perhaps because the company is holding onto so much cash and investments.

Profitability26 Dec 200926 Sep 200927 Dec 20085-Yr Avg
Operating Expenses/Revenue71.4%72.6%76.3%80.4%
ROIC (*)30.5%29.7%30.5%25.8%
Free Cash Flow/Invested Capital (*)35.8%33.4%45.9%35.5%
Accrual Ratio18.7%32.7%24.2%11.1%
Gauge Score (0 to 25)19161817
* For Apple we use Shareholder's Equity instead of Invested Capital

Apple's operating margin has improved substantially, helped by the strong sales of the highly profitable iPhone. 

The Earnings and Free Cash Flow Returns on Equity are excellent, although we're a little surprised the latter did not expand.  (We swapped Shareholders' Equity for Invested Capital because the latter has often been low or negative for Apple.).

The Accrual Ratio is oddly high, which would ordinarily raise a concern about earnings quality.  The high earnings growth rate relative to Cash Flow might be skewing the numbers.

Value26 Dec 200926 Sep 200927 Dec 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)12142410
Share Price ($)$209.04$182.37$85.81-

The dramatic 12-month surge in Apple's share price put a lot of downward pressure on the contrarian Value gauge, but strong Revenue and Earnings kept the score in a reasonable range.

Overall26 Dec 200926 Sep 200927 Dec 20085-Yr Avg
Gauge Score (0 to 100)61587857

Apple's restated financial statements made the gauge scores more consistent with Apple's performance and value.  Strong iPhone sales in the last two years had been understated but are now visible in the GAAP results.

The new 61-point score is very good.  It's down from last year because of the surging share price and because growth rates moderated somewhat.

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

1 comment:

  1. The contrarian value gauge seals it for me. Yes the rise has been good and deserved.I am probably making mistake here but I don't think their run of products can continue.