Evercore: Should Apple be cheaper than Coke?

A better comparison, says analyst Amit Daryanani, would be a luxury brand like Hermes, Tiffany or Estee Lauder.

From a note to clients that landed on my desktop Thursday afternoon:

ALL YOU NEED TO KNOW: Given the sustained share appreciation we have witnessed on AAPL stock a persistent question has been – What’s The Right Valuation for AAPL? While plenty of investors struggle with AAPL’s valuation vs. their historical trends – we think that’s an unfair way to value AAPL given AAPL is less of a product story and has a more robust capital allocation vs. its history. While the rapid rerating has led to calls Apple is overvalued, we think a multiple in the mid-to-high 20s is the new normal as investors start to appreciate Apple’s unique ability to monetize its install base while continuing to release category defining hardware products & services. Fundamentally, we think AAPL ought to trade closer to consumer goods/staple assets and EV/FCF is a better metric vs. P/E – this narrative leads to an upside scenario of $425. In the note, we also present an analysis using a detailed Sum of The Parts, which also nets a price range in the $365-$415 for AAPL.

Net/net: We see the current valuation as sustainable long-term (with potential for further multiple expansion) as investors give Apple more credit for the shift to services and its ability to release new game changing hardware consistently…

Maintains Outperform rating and $365 price target.

Some cool charts:

Apple vs Consumer Goods Companies: We looked at a comp set of 5 of the largest consumer goods companies. Surprisingly, Apple trades at a modest P/E discount (~5%) and a significant discount (~30%) on an EV/FCF basis. We don’t see any justification for this discount as the comps have lower growth expectations, lower margins, and lower ROIC. Stock to $425 assuming Apple’s EV / FCF grows to the consumer goods median.

AAPL vs. Luxury Goods: We looked at a comp set of 7 luxury goods companies. We see a better parallel here given AAPL’s go-to-market and aspirational status. Apple trades at a relatively large discount on both a P/E (~20%) & EV/FCF (~30%) basis despite having better fundamental metrics. If Apple’s P/E multiple were to expand to be in- line with luxury peers, it would drive ~25% price upside. Stock to $405 if Apple’s P/E grows to luxury goods median.

My take: Both comparisons seem a little off. Apple may be, as the lawyers say, sui generis.

9 Comments

  1. David Emery said:
    That’s some actual analysis. I would also find a bear case that has similar kinds of comparisons to be worth reading. This is much better than “watch me pull a supplier number out of my ass….”

    What’s “EV/FCF”? Something divided by ‘Future Cash Flow’?

    0
    February 6, 2020
  2. Gregg Thurman said:
    FCF = Free Cash Flow

    Discounted FCF is my preferred valuation metric. Divide FCF by an ROI rate and you get the value of the company if it were all cash in a bank paying that rate.

    I hope I explained that properly, I’m trying to eat while watching a basketball game.

    0
    February 6, 2020
  3. Fred Stein said:
    Consumer staples and lux are poor comps. Both are propped up by ads. Consumer staples does not have the risk of technical obsolescence and is fairly tolerant of downturns. Lux goods can get hurt in downturns.

    Based on all I heard from the press and analysts, few understand Apple. The media does not tolerate deep analysis. Apple has incredible moats deep in the tech stack and well as brand and coolness. Perhaps Apple biggest strength is its ecosystem, its community of users, developers, and retail technicians.

    All of the above means Apple’s current product revenue is secure. Plus, services grows in three ways: More services; More subscribers; Higher prices. For example all the free TV+ subs become $60/yr subs next year.

    Back to valuation question: Apple’s EPS is already more than twice the 10 year t-bill, with good growth prospects. The current multiple is fine and could go higher.

    3
    February 6, 2020
    • Alan Birnbaum said:
      Devil’s advocate:

      Apple still uses ads to plug their products (it would be an interesting analysis of net profit (EBITDA) /total ad budgets). I think Apple would come out way ahead.

      Free subs do not all convert to $60/year (interesting to see conversion rate; compare to Disney’s conversion rate thru its Verizon freebie trial)

      Otherwise , agree with all your points.

      0
      February 7, 2020
  4. Kirk DeBernardi said:
    Such is the long lasting underbelly blessing of Apple with others using pigeonhole-categories as a metric to understanding their success, or future expected success, all with regular futility.

    Good luck with that.

    It seems that no one can hear the tune that they dance to.

    1
    February 7, 2020

Leave a Reply