How to pitch the bear case for Apple’s share price — updated

This email that came in over the transom to Apple 3.0 from a PR agency (posted with permission):

UPDATE: Misunderstanding. Permission withdrawn.

In the PR letter’s place I offer excerpts from a note sent to Distillate Capital clients under the title “Why we owned — and sold Apple” by Thomas Cole, the agency’s client:

As Figure 8 depicts, both Apple and Microsoft offered remarkably cheap valuations around 2012, with free cash to enterprise value yields around 18% compared to just under 6% for the market overall. Stated differently, with an enterprise value yield of nearly 20%, the implicit math suggests all of Apple and Microsoft’s shares and debt could have been retired in just over 5 years.

apple pitch bear case

In both cases, the shares went from the 100th percentile, or absolute cheapest stocks in the S&P 500 Index, to being among the more expensive most recently. (It is worth acknowledging that since Apple and Microsoft are facing fewer fundamental headwinds in the current environment than many peers in the S&P 500 Index, their current rankings may be getting somewhat flattered.)

Lastly, conversations about growth and value often miss that an inexpensive free cash flow valuation itself can counterintuitively be a driver of growth, as it was for Apple. While forecasts for rolling next twelve month free cash flows increased 50% for Apple from the start of 2015 through Q3 2020, the share count reduction amplified the per share impact of this growth by another 32%! And the magnitude of the share count reduction was driven by just how inexpensive the stock price was in relation to free cash flow. Figure 10 shows Apple’s free cash flow yield versus year-over-year changes in its share count and displays how the excess cash enabled share count reduction.

apple pitch bear case

In relation to Distillate’s U.S. FSV Strategy, Apple and Microsoft were among the strategy’s largest holdings until valuations became more expensive and each stock was sold.

16 Comments

  1. Tommo_UK said:
    My opinion? Don’t feed trolls.

    2
    January 20, 2021
  2. Joe Murphy said:
    Certainly. It’s repeatedly acknowledged there’s value in knowing the Bear and the Bull sides.

    Is there anything to the “Overlooked significance of Apple’s share repurchases” ?

    1
    January 20, 2021
  3. David Emery said:
    Hmmm…. It might be even more interesting if he’d play in a Ped3.0 call with the rest of us.

    1
    January 20, 2021
  4. bas flik said:
    for every company one can discuss above points. its more opinion than analyzing.

    0
    January 20, 2021
  5. Gregg Thurman said:
    My take: What say you? Should I give Cat a call?

    Absolutely. Successful investing requires examining reasonable thesis contrary to your own.

    0
    January 20, 2021
  6. bas flik said:
    multiple expansion is everywhere in the market. look at tesla. many companies saw a dramatic increase in multiple. why? maybe money printing. its not specific to apple. a lot of IPO are insanely valued. 200mio sale, 400mio loss, 40billion marketcap. why? tesla prints more value by issueing shares then making profit.

    You can ask many question to many companies but one. never question a money machine. just enjoy as long as it provides.

    1
    January 20, 2021
    • Gregg Thurman said:
      His valuation model is backwards facing. He isn’t considering future revenue/free cash flows, assuming past will be prologue.

      0
      January 20, 2021
  7. Fred Stein said:
    Thanks for link Ken. The note undermines the bear case.

    The note shows that Apple’s FCF is just over 4% of EV. Apple can borrow well below 4% to buy back shares concentrating future EPS and reducing downside risk.

    1
    January 20, 2021
  8. bas flik said:
    i am happy not being a customer of distillate capital. to much speadsheet analyzing and to little economic understanding. i am looking for a better company than apple for 10 years now. untill now i could not find one besides maybe facebook and alibaba. its true now they are more expensive and they carry more debt which i do not like. but the environment changed. with below zero interest rates. with enormous money printing after collapse lehmann brothers. you are forced by market and competition to collect debt. all this fake printed money finds its way in the share price. everyday 7 billion people will decide the fair price for Apple. They are always right. As an individual really frustrated.

    0
    January 20, 2021
    • David Emery said:
      There’s an old saying about investing in things you’d buy. Under those terms, I wouldn’t touch Facebook. It’s not that I don’t use Facebook, it’s that as a company I think they’re both amoral and the business is built on a fragile infrastructure. Selling other people’s information is risky because of the necessity for governmental oversight, and you never know how legislatures will react to bad business situations. (Sometimes they just rearrange the deck chairs. Other times they torpedo the ship.)

      It is good to see that Jack Ma has reemerged in China.

      2
      January 20, 2021
    • Gregg Thurman said:
      everyday 7 billion people will decide the fair price for Apple. They are always right.

      Investor Sentiment creates Enterprise, not PE (although the formula for both is the same). One, Investor Sentiment, is forward looking and addresses consensus of buyers. The other is backward looking and creates assessments of too high or too low.

      In reality, no matter what you call it, ISM or PE, neither is good nor bad. They are what they are, and that’s where followers of PE get valuations so wrong.

      Seven billion people are never wrong.

      0
      January 20, 2021
  9. Michael Goldfeder said:
    @PED: I say give him a call and invite him to fill out a Q1 Apple revenues and earnings prediction based on “Distillate’s” Bear case analysis. That affords him and his organization an opportunity to put their credibility on the line in a more concise fashion, rather than just pontificating about “their”Apple story using colorful lines on charts and cherry picking data.

    1
    January 20, 2021

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