"Apple Stock Hit by Panic Selling: 'Someone Yelled Fire'""Besides panic selling, the world’s most valuable company faces the daunting fundamental task of growing a colossal revenue base at a fast enough rate to keep growth-oriented managers satisfied."http://www.cnbc.com/id/49842457Reminds me of several other companies.Tim
I'll probably be buying more tomorrow, at roughly 8 X current earnings, ex-cash. (Could possibly be closer to 7 at this point.) It'll be fun to watch when all the institutional guys currently bad-mouthing it are body-checking each other to get back in (which I expect to see pretty soon). We'll see.
Bought some more, at $511. I'll call it 7.5 X my rough estimate of current run-rate earnings, ex-cash.
I'll call it 7.5 X my rough estimate of current run-rate earnings, ex-cash. I read the Apple 10-K and noted the following regarding the cash: As of September 29, 2012 and September 24, 2011, $82.6 billion and $54.3 billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.So $82.6 billion of the $121.3 billion, or 68%, is "trapped" outside the United States. My understanding of the repatriation tax is that Apple would have to pay the difference between the 35% US statutory rate and whatever rate they paid to foreign governments on the earnings (which is almost always lower than the US statutory rate). So I'm not sure what the tax hit would be but it could be substantial - maybe 20% of the $82.6 billion.The same is true of Microsoft and many other companies. And the prospect of a repatriation tax holiday seems quite remote. I don't think this changes the valuation of Apple all that much but whenever I read about P/E ratios excluding cash I feel like there should be some way to account for the foreign holdings. Locked up foreign holdings also create some capital allocation issues ... not at Apple necessarily but we did see some of this at Microsoft when Skype was acquired using "foreign cash".
Of course you're right, Ravi. I realize it's not quite realistic to subtract 100% of the cash hoard, but it's a lot more realistic than ignoring it completely, as most people do. If I only count, say, $100 of AAPL's roughly $140 per share, it might raise my estimate of current P/E all the way to 8.
Apple certainly does seem cheap. The next few years appear to be quite clear. Beyond that I don't know. It looks to me like Microsoft has botched the Surface release and I can personally see no reason to want Windows 8 or to buy a new PC until my current laptop (3.5 years old) dies. Apple has a long runway if they can keep innovating and taking share in PCs while continuing to dominate tablets and maintain share in high end smart phones. My guess is the hedge fund managers are "locking in" what remaining gains they have ahead of year-end due to fiscal cliff worries and Apple is widely owned. Last time I checked hedge funds were having less than a spectacular 2012 and that was before the current decline...
Yeah, I finally gave up on MSFT and sold my last remaining shares just after the release. At least I made money there --unlike in HP, which I gave up on early this year.
Why wouldn't they be required to book a reserve for repatriation tax liability? It is a contingent liability that is reasonably easy to calculate. If they don't have to book it, shouldn't they estimate and disclose the liability in a foot note.
Why wouldn't they be required to book a reserve for repatriation tax liability? It is a contingent liability that is reasonably easy to calculate. If they don't have to book it, shouldn't they estimate and disclose the liability in a foot note.Management has the flexibility to designate foreign earnings as "indefinitely reinvested". If they do so, no tax is due to the US government until the funds are repatriated and no deferred tax liability is carried on the balance sheet. It would be great to either always require this deferred tax liability or at least force disclosure in footnotes. Currently companies aren't even required to disclose how much cash is held in foreign subsidiaries although many companies such as Apple and Microsoft voluntarily disclose the dollar amount (but not the tax hit if the funds were hypothetically repatriated on the balance sheet date).A better idea could involve taxing corporate worldwide income (just as individuals worldwide income is taxed) in exchange for lowering the corporate tax rate significantly. I don't know what a revenue neutral rate would be but it would be much better than 35%. Supposedly both parties want to see a lower corporate tax rate so this could be part of a "grand bargain". To the extent that investment income is double taxed at the individual level upon payment of dividends or realization of capital gains a cut in the marginal corporate tax rate could offset some if not all of the negative impact of personal income tax rates rising on investment income. But this probably makes too much sense for our political system.
I don't think this changes the valuation of Apple all that much but whenever I read about P/E ratios excluding cash I feel like there should be some way to account for the foreign holdings. Locked up foreign holdings also create some capital allocation issues ... not at Apple necessarily but we did see some of this at Microsoft when Skype was acquired using "foreign cash". Assuming no change in tax policy, it absolutely does make a substantial difference in Apple's valuation. The value of any business is the discounted value of all distributable cash during the existence of the business. Unless Apple repatriates the money, it can't distribute it.That being said, I read somewhere recently Apple accounts for the tax it would have to pay when it reports its earnings. I haven't looked that up yet in its official filings. Anyone know about this?
Of course you're right, Ravi.I realize it's not quite realistic to subtract 100% of the cash hoard, but it's a lot more realistic than ignoring it completely, as most people do.If I only count, say, $100 of AAPL's roughly $140 per share, it might raise my estimate of current P/E all the way to 8. Beyond the tax repatriation issue (which must be accounted for), there is also the issue about how well that retained cash will be used. As Buffett has pointed out, this issue regarding how well retained earnings are managed is of utmost importance in valuing a business.With Apple, I'm not sure what I think. I think they're doing great things with a (relatively small) portion of the cash...that which is being spent on expanding the business. But then the vast majority of it is sitting in fixed income investments earning less than 1% annually. While these investments seem "safe", they are actually losing purchasing power via inflation. It is like sand slowly falling through the fingers of your hands. And it's not at all clear from Apple management that they care a whole lot about using this cash in a way that maximizes shareholder value. They don't talk about it much, and they're doing nothing with it.So what I'm starting to do is not to subtract it out when thinking about Apple's value, but rather having it count as part of the margin-of-safety. I figure if I'm happy with the price of Apple without that cash hoard, then I should be really happy with it. Nevertheless, if they don't start making better use of the continually-growing cash hoard soon, then it will become a negative. To those who doubt that, do a thought experiment: what is the intrinsic value of a business which perpetually retains all earnings, and allocates the bulk of those earnings forever to investments earning less than the rate of inflation?
From the 10-K:The Company’s effective tax rates were approximately 25.2%, 24.2%, and 24.4% for 2012, 2011, and 2010,respectively. The Company’s effective rates for these periods differ from the statutory federal income tax rate of35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because suchearnings are intended to be indefinitely reinvested outside the U.S.As of September 29, 2012, the Company had deferred tax assets arising from deductible temporary differences,tax losses, and tax credits of $4.0 billion, and deferred tax liabilities of $14.9 billion.So if I'm understanding this correctly (and please educate me if I'm wrong), we should substract about $11 billion when considering that cash pile...separate from considerations about how productively it might be used in the future.
Some familiar names appear on the list."Why Dividend Stocks Still Dominate The World's 'Most Valuable Brands'" http://seekingalpha.com/article/907871-why-dividend-stocks-s...Tim
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