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Author: Plato90s Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 201979  
Subject: Re: What you should know aobut The Books Date: 1/8/2001 11:06 AM
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While I usually find myself in complete agreement with RodgerRafter, I'd have to disagree on some point here.

First of all, I disagree that book value is more important than earnings. Earnings, as reported to Wall Street, is indeed a number which can be twisted like a pretzel, which is why I prefer to look at a narrow definition : operating income or free cash flow. Operating income tells us how well the company is executing on its business and free cash flow tells us what the company is doing with its cash.

Book value is useful only as a way to guage the long term effects of a company's operations. Logically, a consistently profitably company would have ever-increasing book value. In fact, that is not the case. With a greater and greater percentage of assets being in the form of equity, book value will now be changed by the stock market. As the case of AKAM and ELNK demonstrates, book value can evaporate faster than you can earn money to replace it. Apple also spent ~$150M of cash to purchase 3.7 million shares of AAPL, which is now worth less than $65M. That's another $85M of book value which has vanished. But once the stock price rebounds, it will re-appear.

So my conclusion is that book value is really not the best method to evaluate a company, since it's about as volatile as any of the other numbers like P/E and EPS. I'd have to advocate the basics. Does the company make a profit? If so, how much money? This is where operating income and cash flow really comes into play, and both are areas I like to pay attention to.



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A few minor corrections as well.

When calculating the book value, you should also take into account the Account Payable vs. Account Receivable. For Apple, Accounts Payable is $200M greater than Receivable. That's $200M that Apple, Inc. owes somebody for which it will have to get cash from its own accounts to pay. It should be accounted for.

In addition, the number of outstanding AAPL shares is 321 million, not the 300 million shares that RodgerRafter used.

Regarding the $2.5B of intellectual property, I'm not sure how to respond to that. R&D investment doesn't always lead to returns, especially in Apple's case where many in-progress R&D projects were never completed. Does the work done on OpenDoc or Rhapsody really translate into IP of value? When the investment in R&D creates software like iMovie, which is given away for free, doesn't it imply that the value of the R&D is already reflected in hardware sales?

The classic example here is the Xerox PARC facility, which has helped to spawn some of the most basic inventions of the computer age. Xerox was unable to benefit from the results of their R&D investment, both due to lack of vision and lack of ability to follow through.


Getting back to the question of what AAPL is worth, I tend to agree with RodgerRafter that buying AAPL stock at <$20 is probably a decent bet. I wouldn't be confident of your ability to take a "nice fat profit" since AAPL did have an entire decade of mediocre returns. But at least you won't lose your shirt on it, which is about as good a recommendation as any stock can receive in this volatile market.
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