Toni Sacconaghi: How Apple generated an extra $6B in free cash flow

From Max Cherney’s “Apple Has Cut $5 Billion From Its Spending. What That Means for the Stock” ($) posted Monday in Barron’s:

The company (ticker: AAPL) has been reducing outlays on manufacturing equipment for its suppliers in China, where it has historically invested in gear, effectively financing third-party operations in exchange for secure production capacity for hardware components, according to a Tuesday note from Bernstein analyst Toni Sacconaghi. The analyst calculated that a decline in capital expenditures had generated an additional $6 billion in non-GAAP free cash flow over the past two years.

In the note, Sacconaghi wrote that about 75% of the company’s capital spending has typically gone into machinery, equipment, and internal-use software. Data centers and tooling and machinery for its suppliers are the two biggest drivers of such spending, he said.

Sacconaghi said that after several conversations with Apple, his team concluded that capital spending isn’t likely to return to prior historical levels in the near future.

Apple said to the analyst that its reduced expenditures were related to its environmental, social and corporate governance initiatives. Sacconaghi said that his team suspects that the main reason for the reduced spending is that Apple is now more confident it can source components for its various pieces of hardware, and no longer needs to finance its manufacturing partners.

Maintains Market Perform rating and soggy $100 price target. 

My take: His team’s explanation sounds reasonable to me.