AAPL–Warren Buffet

Christopher Lum Lee

 

I recently read The New Buffettology: The Proven Techniques for Investing Successfully in Changing Markets That Have Made Warren Buffett the World’s Most Famous Investor by Mary Buffett and David Clark. The key lesson that I’ve learned from this book is about Buffett’s “Ten Points of Light” to determine if the company is one that Buffett would invest in.

In an attempt to take this information from the book and incorporate it into my investing style, I have conducted an analysis in previous articles about Pfizer (PFE) and Verizon (VZ). I was asked to provide an analysis on Apple (AAPL), though I hold no position in Apple, I would like to take this opportunity to provide this analysis so hopefully anyone considering an investment or already has one in this business can make use of.

In the book, Buffett states that for him to invest in any business, they must have a durable competitive advantage and meet all ten of the following criteria. Some of the criteria is fairly objective, some remain subjective in interpretation and you may decide to allow some leniency in the criteria evaluation.

Number 1. The Right Rate of Return on Shareholders’ Equity

In examining Apple’s shareholders’ equity, the company has to show a consistently high rate of return on equity- above 12%, which is considered by Buffett to be ‘above average.’

Net Income and Shareholders’ Equity has been taken from Yahoo! Finance. Given this information, the following calculation of net income divided by shareholders’ equity is done:

*All numbers in thousands

Year Net Income Shareholders’ Equity Return on Equity (ROE)
2010 $1,4013,000 $47,791,000 .293 = 29.3%
2011 $25,922,000 $76,615,000 .338 = 33.8%
2012 $41,733,000 $118,210,000 .353 = 35.3%

Though we only have three years worth of data, looking at this information shows a consistent increase in ROE that has increase 6% between 2010-2012.

Score: 1-0

Number 2. The Safety Net: The Right Rate of Return on Total Capital

According to Investing Answers, the return on total capital is calculated by taking the sum of net income less dividends and dividing that by the sum of debt plus equity. Buffett looks for a consistently high rate of return on total capital.

Looking at some more quantitative data, debt was determined as the total current liabilities plus long-term debt.

*All numbers in thousands

Year Net Income – Dividends Debt + Equity Return on Total Capital (ROTC)
2010 $14,013,000 $68,513,000 .204 = 20.4%
2011 $25,922,000 $104,585,000 .247 = 24.7%
2012 $39,245,000 $156,752,000 .250 = 25.0%

Between 2010 and 2012, we see that Apple has delivered a positive rate of ROTC.

Score: 2-0

Number 3. The Right Historical Earnings

Buffett looks for companies that produce an annual Earnings Per Share (EPS) that historically shows a strong upward trend. Nasdaq.com provides more historical data on the annual EPS. Let’s look at this data since 2007:

Year EPS Year EPS
2007 3.93 2010 15.15
2008 5.36 2011 27.68
2009 9.08 2012 44.15

As you can see by this data, the annual EPS has grown hand-over-fist.

Score: 3-0

Number 4. When Debt Makes Buffett Nervous

The book states that “…companies with a durable competitive advantage typically have long-term debt burdens of fewer than five times current net earnings.” Let’s look at the debt-to-equity ratio using the formula of total liabilities divided by shareholders’ equity. Looking back at 2010-2012 again with data courtesy of Yahoo! Finance, we receive the following information:

Year Total Liabilities Shareholders’ Equity Debt-to-Equity
2010 $27,392,000 $47,791,000 .573
2011 $39,756,000 $76,615,000 .518
2012 $57,854,000 $118,210,000 .489

This data shows that not only does Apple have a low debt-to-equity ratio, but it also steadily decreases the ratio as liabilities and equity increases over this period.

This is one of the sections that I feel could be slightly subjective because the book didn’t state what an ideal debt-to-equity ratio would be. However, I feel that this is still a good showing.

Score: 4-0

Number 5. The Right Kind of Competitive Product or Service

The book advises asking yourself the following questions: “Is the product that kind that stores have to carry to be in business? Would the businesses that carry this kind of product be losing sales if they didn’t carry this particular brand-name product?” The idea is to find a business/product that consumers are continuously in need of, not one they buy once in their lifetime.

Producing a competitive product is what made Apple truly shine over the years! Apple is now a household name because of the products made such as the iPod, iPhone, iPad, and Macbook are the biggest selling products at this time. This begs the question of who are the biggest competitors to Apple’s legacy? The answer guides me to Samsung (SSNLF.PK), Google (GOOG), Microsoft (MSFT). Samsung and Google are competitors of the iPhone as Microsoft is the competitor of Apple’s operating system platform.

The competitive advantage comes from putting out newer models and versions of software or products. The demand for the newer, sexier, smaller, and more technologically heavy product will remain consistent.

Score: 5-0

Number 6. How Organized Labor Can Hurt Your Investment

Seldom will you find a durable-competitive-advantage company with an organized labor force.

In 2011, the (unofficial) Apple Retail Workers Union was established to represent the retail employees. This initiative was started by Cory Moll, who departed from Apple in April 2013. The union was established for the same reasons that most other unions battling corporations are established: better wages, benefits, and promotability. In response to the creation of this union, the administration has required all retail managers to undergo “union awareness” training to learn more about attempts by employees to unionize.

While a labor union isn’t the worst thing to happen to a big company like Apple, depending on the relationship between the labor and management, a union could be crippling. In my research of the interactions between Apple and the Apple Retail Workers Union, I couldn’t find any evidence of anything that would cripple Apple’s ability to remain profitable and continue to manufacture competitive products.

Score: 6-0

Number 7. Figuring out Whether the Product or Service Can Be Priced to Keep Abreast of Inflation

…a business with a durable competitive advantage is free to increase the prices of its products right along with inflation, without experiencing a decline in demand. That way its profits remain flat, no matter how inflated the economy goes.

When it comes to manufacturers, I believe that a product can be priced to inflation for only so long before customer demand would suffer. Recent developments in the case of the latest iPhone shows that the phone is not targeted towards emerging markets. This means that the limited target demographic is in the developed markets of consumers who can afford high-priced gadgets. This in itself is neither good nor bad – but as inflation kicks in and the pricing structure increases, you could very well see a decrease in demand as less people may be able to afford these gadgets. To make matters worse, this was only in relation to the manufacturer, not the retailers, who also add on their piece of the profit.

While I don’t doubt the popularity of any of Apple’s products, everyone has to admit that there’s a price that people aren’t willing to pay for an iPhone or any other Apple product.

Score: 6-1

Number 8. Perceiving the Right Operational Costs

This point considers how retained earnings is used to maintain the durable competitive advantage. The idea is to take the amount of retained earnings by a business for a given period of time and measure its effects on the business’ earnings capacity.

The book gives the following example with H&R Block (HRB):

In 1989, H&R Block, a company with a durable competitive advantage, earned $1.16 a share. This means that all the capital the business had accumulated until the end of 1989 produced for its owners $1.16 a share. Between the end of 1989 and the end of 1999, H&R Block paid out in dividends a total of $9.34 a share. So [f]or that ten-year period, H&R Block had retained earnings of $7.80 a share ($17.14 – $9.34 = $7.80) to add to its equity base.

The company’s per share earnings increased during this time from $1.16 a share to $2.56 a share. We can attribute the 1989 earnings of $1.16 a [s]hare to all the capital invested and retained in H&R Block up to the end of 1989. We can also argue that the increase in earnings from $1.16 a share in 1989 to $2.56 a share in 2000 was due to H&R Block’s durable competitive advantage and management’s doing an excellent job of investing the $7.80 a share in earnings that the company retained between 1989 and 1999.

If we subtract the 1989 per share earnings of $1.16 from the 1999 per share earnings of $2.56, the difference is $1.40 a share. Thus we can argue that the $7.80 a share retained between 1989 and 1999 produced $1.40 a share in additional income for 1999, for a total return on 17.9% ($1.40 divided by $7.80 = 17.9%).

Working on Apple using this process, let’s start with 2010:

In 2010, Apple earned $15.15 per share. This means that all capital received until 2010 produced $15.15 per share for its owners. Between the end of 2010 and 2012, the total EPS was $86.98. Of that, $5.3 was paid out in dividends. Therefore, for that three-year period, retained earnings were $81.68 ($86.98 – $5.3 = $81.68). Earnings increased during that time from $15.15 to $44.15. By subtracting the 2010 EPS of $15.15 from the 2012 EPS of $44.15, we get $29.00. Therefore, the retained earnings of $81.68 between 2010 and 2012 produced $29.00 per share – a 35.50% increase in retained earnings.

Score: 7-1

Number 9. Can the Company Repurchase Shares to the Investors’ Advantage?

Buffett likes companies that buys back their shares- citing that with share buybacks comes price appreciation. More importantly, he likes companies that have buybacks regularly instead of occasionally.

Apple does not have a history of buying back their shares. Apple’s current share buyback plans are overshadowed by activist investor Carl Icahn’s own push for Apple to purchase at least $150B worth of shares.

Though Apple will not get this point, it will be interesting to see in the near future what happens with the talks of the share buyback. Given Icahn’s history as an activist investor, I do believe that an Apple share buyback would increase the share price and ultimate value of the business that will be passed on to investors.

Score: 7-2

Number 10. Does the Value Added by Retained Earnings Increase the Market Value of the Company?

“Warren believes that if you can purchase a company with a durable competitive advantage at the right price, the retained earnings of the business will continuously increase the underlying value of the business and the market will continuously ratchet up the price of the company’s stock.”

On December 31, 2010, Apple had a price/book ratio of 5.435 per share and traded at $322.56 per share. As of the close of business on Friday, October 11, 2013, Apple had a price/book ratio of 3.630 per share and closed trading at $492.94. This means that the book value has decreased by approximately 33% while the share price has appreciated by approximately 36%! While this isn’t the most definitive determination, this gives an indication that this criteria has not been met.

Final Score: 7-3

Closing Thoughts

Overall Apple is a good company. From a financial management perspective, I believe that Apple has grown to be a market leader that is paving the way for future technological advancement and growth for investors. However, given the information presented, in a black-and-white world, Warren Buffett would not invest in Apple.

While this article may draw criticisms from some readers, either on the formulas used or my interpretation of some of these points, I do encourage readers who are interested in Apple as an investment to read this book and conduct their own analysis and see what your findings would be.

German Town Produces Hydro Surplus. Wildpolsried

It’s no surprise that the country that has kicked butt at the Solar Decathlon competition (to produce energy positive solar houses) year after year is the home to such a productive energy-efficient village.

Image

The village’s green initiative first started in 1997 when the village council decided that it should build new industries, keep initiatives local, bring in new revenue, and create no debt. Over the past 14 years, the community has equipped nine new community buildings with solar panels, built four biogas digesters (with a fifth in construction now) and installed seven windmills with two more on the way. In the village itself, 190 private households have solar panels while the district also benefits from three small hydro power plants, ecological flood control, and a natural waste water system.

All of these green systems means that despite only having a population of 2,600, Wildpoldsried produces 321 percent more energy than it needs – and it’s generating 4.0 million Euro (US $5.7 million) in annual revenue by selling it back to the national grid. It is no surprise to learn that small businesses have developed in the village specifically to provide services to the renewable energy installations.

 

Over the years the village’s green goals have been so successful that they have even crafted a mission statement — WIR–2020, Wildpoldsried Innovativ Richtungsweisend (Wildpoldsried Innovative Leadership). The village council hopes that it will inspire citizens to do their part for the environment and create green jobs and businesses for the local area.

As a result of the village’s success, Wildpoldsried has received numerous national and international awards for its conservation and renewable energy initiatives known as Klimaschutz (climate protection). The council even hosts tours for other village councils on how to start their own Klimaschutz program. The Mayor has even been doing global tours ever since the Fukushima disaster.

Mayor Zengerle has gone to Romania, Berlin and the Black Sea Region to speak about how these places can transform their communities and make money in the process. Speaking to Biocycle, Mayor Zengerle said, “The mitigation of climate change in practice can only be implemented with the citizens and with the Village Council behind them 100 percent of the way. This model cannot be forced from only one side. We often spend a lot of time talking to our visitors about how to motivate the village council (and Mayor) to start thinking differently. We show them a best practices model in motion and many see the benefits immediately. From the tour we give, our guests understand how well things can operate when you have the enthusiasm and conviction of the people.”

Read more http://www.trueactivist.com/german-village-produces-321-more-energy-than-it-needs/

Enbridge: Truth Shifter

Juanita Hadwin

http://www.vancouversun.com/opinion/op-ed/Opinion+Enbridge+misrepresents+pipeline+benefits/8780459/story.html
As an economist, I am troubled by continued attempts by Enbridge to misrepresent the facts of this project, even as these facts pertain to their own analysis. In an opinion piece in The Vancouver Sun last week, Enbridge executive Janet Holder claimed, “The Northern Gateway pipeline represents a $6.5-billion investment in our economy. It will create 3,000 jobs during construction and 560 permanent British Columbia jobs.”

This is just not true.

Enbridge’s analysis assumes Alberta will export the same volume of crude oil whether or not Northern Gateway proceeds. So whether the project is built through B.C., or elsewhere in Canada, Enbridge believes billions in capital investment will be made no matter what the outcome of the board’s decision. Therefore, there will be no economic loss to Canada’s economy if the National Energy Board rejects the project. Enbridge’s basic assumption renders their impact analysis as nothing more than double counting and negates their ability to claim benefits.

Even if Enbridge assumed oilsands crude would be shut-in if Northern Gateway were not built — and hence their project might represent new investment in the economy — a significant portion of the project’s capital cost relates to the condensate import line. Condensate is used to mix with oilsands bitumen to move the heavy, tar-like product down a pipeline. Canada does not produce enough condensate and is becoming increasingly dependent on foreign markets so big oil can turn around and export it back out again mixed with their bitumen.

Not only has Enbridge failed to consider the economic opportunity cost to the Canadian economy of importing condensate instead of upgrading bitumen to synthetic crude oil in Alberta, it consistently pawns off capital spending and operation of the condensate import pipeline as if it were an economic benefit to Canada instead of an economic drain.

Claiming Northern Gateway will create 3,000 jobs during construction does not pass the truth meter either. This is the same claim Enbridge made in its Path to the Future ad campaign last year. This number comes from Volume 6C of their application, but its 3,029 person years of construction employment is for three months in the third year of a four-year project.

Person-years of employment are not jobs. If you work for a company for five years as a carpenter or an electrician: that is a job. Enbridge would call it five. Digging deeper into Enbridge’s own analysis reveals that construction jobs from Northern Gateway are just over 1,000 — not the 3,000 they claim.

That doesn’t mean they are guaranteed jobs for British Columbians or Albertans as they may go to anyone, even offshore temporary workers.

And now for the permanent B.C. jobs claim. The 650 permanent jobs come from the same document as the construction employment figures. Only 78 jobs are related to the actual project. The rest are estimates of employment from direct input purchases, indirect and induced impacts over 30 years.

For example, if Enbridge needs to repair its dock at the marine terminal, people who make the materials would be included as part of the direct input purchases, while the delivery truck driver would be included in the jobs allocated to indirect impacts. When the delivery truck driver buys a beer with the money she made delivering supplies, the bartender who serves her has his job included as part of the induced category. Only 12 per cent of the projected 650 jobs in B.C. come from operating the pipeline and marine facilities.

In the interests of transparency and accountability, British Columbians deserve better than what Enbridge seems capable of delivering.

Robyn Allan is an economist and former CEO of the Insurance Corp. of B.C. She provided evidence on economic, financial and insurance issues related to Enbridge’s application to the national energy board and appeared as an expert witness at the hearings.”

© Copyright (c) The Vancouver Sun

3905D Cadboro Bay

This image is of my grandfather and his farm on Cadboro Bay around about 1940 I estimate. Clifford is there to his right–so the war has started  but Clifford has not yet joined up nor is he married. The young  of child in the picture is most likely one of my cousins, a son of Norah who was a sister of Clifford. She is married to John Henry an RCMP officer. So the child is also John Henry.

Note how prosperous the farm is and how rural Cadboro Bay still is. The stooked hay is for the Jersy cow that provided them milk, butter and cheese. The small building to the left is the chicken coop. With fish and clams from the ocean as required they had little to purchase except salt, tea and flour.

The pile of firewood is all from driftwood that floated into the bay. More than enough for the winter ahead.

I would have first visited the farm a year or so after this image was recorded. By then, Clifford would be married and in the air force and off defending Britain.

UCC farm pic

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AAPL: Barclays says to borrow and increase dividend to 3.5%

Apple Inc. (NASDAQ:AAPL) with $137 billion in cash and cash equivalents should borrow money?!Barclays debates this issue in a report released yesterday (Barclays also reiterated its belief in the report that the Apple Inc. (NASDAQ:AAPL) iPhone 5 has the best camera of any iPhone yet). The tech giant does not need the money, but they could issue debt at low cost. Issuing the debt would remove any need to use overseas cash which would be taxed at 35% in certain circumstances. We summarize (in many words) Barclays key points below.

Apple Logo

Time to Borrow?

Barlcyas notes the pressure from shareholders and a significant amount of excess cash on the balance sheet (30% of cash on balance sheet is domestic) is making Apple Inc. (NASDAQ:AAPL) consider a much more significant shareholder return strategy. Currently, Apple has a three-year $45 billion capital return plan in place that has already been depleted by $10 billion.

Barclays believes that Apple should now be strongly considering tapping the debt markets to “borrow against” the significant overseas cash position. This way, Apple could maintain flexibility to make acquisitions and not incur a tax hit for repatriation—all for very low current borrowing costs . As a result, Barclays estimates that Apple could easily double the size of its three-year plan, among the many options it has. However, the analysts still do not expect Apple Inc. (NASDAQ:AAPL) to issue special dividend but expect an updated and thoughtful long-term plan over the next few months.

Even without borrowing, Apple Inc. (NASDAQ:AAPL) should have room to increase its total cash outlay for dividends and buybacks over the next three years. However, borrowing could really change the situation, adding meaningful upside or flexibility to that level. Should Apple tap the debt markets, the company could borrow up to $50 billion technically “against” existing international cash if it wanted to.

Even though this issuance could be very large, the market would likely back such an issuance at a very attractive rate for Apple considering the debt could still be repaid with existing international cash balances after assuming a 35% tax rate for repatriation. Based on precedent set by other maturing companies in the tech space, like IBM, Barclays believes that Apple would be able to borrow at very attractive rates – perhaps below 2%.

Based on their detailed analysis around borrowing,  Apple Inc. (NASDAQ:AAPL) probably has the potential to double its level of capital returns if the company makes complete use of its balance sheet.

First, Apple could sustainably boost its dividend to more than $14.75 which would put the dividend at a 3.5% yield based on current price. This raise could be accomplished with only domestic free cash flow at this point – essentially a domestic free cash flow sweep for the next couple of years. This yield would be attractive considering it would take Apple’s yield above that of Cisco and other bellwethers. If Apple could achieve a yield comparable to other blue chip companies, Barclays thinks that Apple could increase to the $575 level.

Second, they believe Apple has the capacity to increase its buyback program at the same time by $30 billion over three years (up from the existing $10 billion share repurchase program). Over the next three years, an increase of this magnitude ($10 billion per year) could add an average $0.65 in added EPS per year.

Barclays is running all their analysis under the assumption that Apple Inc. (NASDAQ:AAPL) would want to maintain at least $10 billion per year in domestic cash through the forecast period – which could be reserved for M&A and general corporate purposes.

AAPL Quaterly and Annual EPS (USD) Chart

In March 2012, Apple Inc. (NASDAQ:AAPL) unveiled a new dividend and share repurchase program. The company started a quarterly dividend of $2.65/share ($10.60 annualized), which was first paid in 4QFY12 and consumes about $10 billion in cash per year. At that time, Apple indicated it would periodically discuss updating the dividend but no time frame was set.

The company first paid a dividend in June 1987 and stopped payments in December 1995. In addition, the Board of Directors authorized a $10 billion share repurchase program that began in Apple’s FY13. The repurchase is expected to be executed over three years primarily to neutralize the impact of dilution from future employee equity grants and employee stock purchase programs. Combined, Apple expects these new programs to utilize about $45 billion of domestic cash in the first three years. Apple had about $43 billion of domestic cash as of its December 2012 quarter-end.

Regardless of how the plan eventually unfolds, something is likely to occur soon, given recent efforts by activists. On February 7, Apple Inc. (NASDAQ:AAPL) released a statement regarding a recent effort byDavid Einhorn to rally support against a proposal to eliminate the company’s capacity to issue “blank check” preferred stock.

In the company’s response to a call for preferred shares, Apple reiterated its current capital return program of $45 billion over three years, noting that $10 billion will have been distributed by the dividend payable date of February 14. Apple noted it would take under consideration the proposal from activist shareholders.

Apple also clarified that the proxy proposal also is meant only to curb management’s ability to issue stock without shareholder approval – the change to Apple’s articles of incorporation would not forbid the company from issuing preferred stock completely. Though the proposal was not passed at the latest shareholder meeting, the analysts expect a similar proposal to re-emerge at the request of key shareholders in the near term.

Barclays believes that a larger cash return program is needed given Apple Inc. (NASDAQ:AAPL)’s share price volatility. Furthermore a new initiative could help smooth the transition from “growth” to “value” investors, which is occurring due to Apple’s slower sales momentum.

Apple Unit Model Chart

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For the moment, this post should arrive with every category of post. This is a blog designed to provide information about facilities in the Koksilah Valley.

 

IT WILL DISAPPEAR.

There are a number of interesting places to stay right in the valley and even more in Cowichan–Koksilah Bay.

Since the Koksilah River is south of the Cowichan River, the village of Cowichan Bay is actually part of the Koksilah valley drainage system!

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For farms, check out http://roadramble.wordpress.com

My own  road is road ramble.   My comments on other roads around the world are in roadrambles.wordpress.com

Dave Godfrey