High praise for Apple’s free cash flow

The founder of the Deep Value Investment Club of London likes Apple’s deep value.

From Michael Wiggins De Oliveira’s Not Too Late For Shareholders To Act:

In my humble opinion, as an incessant bargain hunter, I believe that the market is under-appreciating Apple’s unrivaled war chest. Apple’s Q1 2018 results showed it having a net cash position of $163 billion — roughly speaking 20% of Apple’s market cap made up of cash. Furthermore, CFO Luca Maestri was resolute and unshakable on its earnings call that Apple would be a huge beneficiary of the recently enacted U.S. tax law, and that it would seek to repatriate its huge overseas cash…

I define a good business as being a business with a high free cash flow margin (defined as FCF/Revenue expressed as a percentage). I favor high free cash flow margin businesses, above 5% FCF margin, as these typically represent an ROE above 15%. Furthermore, given the choice, I prefer to work a little harder and seek out businesses with a FCF margin above 10%.

By comparison, Apple’s average free cash margin over the past five years is more like 25%.

free cash flow

Moreover, as De Oliveira notes, Apple is one of those rare high FCFs with a low PE.

More often than not, when high FCF generating businesses present themselves, these businesses are nearly always trading at inflated multiples, leaving the bargain hunter without the necessary margin of safety for a rewarding investment. However, as can be seen, Apple certainly has a huge FCF margin.

My take: This might not be news to anyone here, but it’s refreshing to read it on Seeking Alpha.

6 Comments

  1. Michael Thompson said:

    Smart long-term investors know this completely and thus cannot be deterred by FUDD specialists.

    We are on the cusp of the greatest transfer of wealth in corporate history from a company to its shareholders. The oft-cited $163 billion net cash figure is already too low. We will shortly learn that Apple has $170-175 billion in net cash as of 3/31/18 and by the time they make that announcement on May 1st, we’ll be even higher.

    As Apple spends money on an ever increasing dividend and stock buyback, the FCF will continue pouring in. I have calculated that Apple can spend about $500 billion over the next 5 years on increased dividends and buybacks with the current net cash and the accumulated FCF over that period.

    In other words, Apple will likely trade for hundreds per share (300, 400 or 500) within 5 years

    3
    April 16, 2018
    • Gregg Thurman said:

      I can’t agree more on your price targets, even factoring in a low ISM (PE) I’m getting those targets ($500 in 5 years).

      What I’d really like in the meantime is to see De Oliveira’s assessment of Apple’s future re-iterated in the WSJ, Fortune, Barron’s, Investor’s Business Daily and on CNBC and MSNBC. Alas seeing that happen is far less likely than AAPL hitting $500 in 2023.

      2
      April 16, 2018
      • Michael Thompson said:

        Unfortunately, there’s rarely an echo chamber of good news from the MSM about Apple.

        One thing that we should be closely following is the institutional ownership of Apple in the coming years. Institutions owned 62% or about 3.2 billion shares of Apple as of the latest 13F filings (through 12/31/17). When Apple takes its shares outstanding to 3.2 billion in the coming years, who’s going to give up their stock, the institutions, the investing public (currently own 38% or 1.85+ billion shares) or a combination of both? I know that my shares are not for sale and I have a strong feeling that Berkshire Hathaway’s 3.3% ownership isn’t for sale.

        We are going MUCH higher and we laugh last.

        0
        April 16, 2018
        • David Sauceda said:

          Largest shareholders link: https://finance.yahoo.com/quote/aapl/holders/

          Michael, I hear you, but I may need your help explaining this to me from your astute angle.

          Through various readings of past, I’ve innocently convinced myself Apple conducted their 7-to-1 split on 6/9/14 because Apple needed to attract more “institutional buyers” for investment purposes, yet I’m dumbfounded why a lower stock price would intice large buyers — with big pockets. In simpler words, if an investment firm like Blackrock has billions to invest [in Apple], why would a lower stock price encourage monies from such firms?

          There is a point here I want to make (if time and current travel conditions permit).

          0
          April 17, 2018

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