Wednesday, April 29, 2015

Apple's Cash

Apple (AAPL) has been returning, to say the very least, a whole lot of cash to shareholders since August of 2012:

From the inception of its capital return program in August 2012 through March 2015, Apple has returned over $112 billion to shareholders, including $80 billion in share repurchases.

The company's share count is down nicely as a result of the share repurchases and, based upon the expanded program, should continue to drop.* Yet, after returning the $ 112 billion, the company still has net cash and marketable securities of nearly $ 150 billion.

The key word here being "net". Total cash and marketable securities is actually more than $ 193 billion but, after subtracting debt, the number is more like just under $ 150 billion.

Consider the fact that net cash sat at roughly $ 117 billion just before this capital return program began. So the company has still been able to increase its net cash and marketable securities after allocating the $ 112 billion.

What's more astonishing is the fact that the company's net income was $ 1.3 billion on $ 13.9 billion of sales back in 2005.

Compare that to net income of 39.5 billion on sales of $ 182.8 billion in its last full fiscal year.

Those numbers are on track to be even higher in 2015.

I think it's fair to say that's quite a decade plus.

Now, the fact is Apple remains incredibly dependent on regular product innovation. What was highly competitive not long ago requires ongoing improvements just to remain competitive. I mean, they're not exactly selling soft drinks and snacks. Whether or not Apple can maintain its advantages and competitive position over the longer haul is, at least for me, a tough question to answer. The company may still be making great products many years from now but, even if they are, that doesn't guarantee today's outstanding business economics will be persistent.

An innovative company might continue creating quality products but, due to a changing competitive and technological landscape, what were once attractive returns on capital become much less so. It need not be something catastrophic for the core economics to be hurt in a way that's meaningful for long-term investors.

Charlie Munger, at the 2015 Daily Journal (DJCOshareholder meeting last month, was asked whether companies like Google (GOOG) and Apple have sustainable moats.

Part of his response was this:**

I am not an expert on the moats of technology companies. The reason, by and large, I don't own them is because I do not understand whether or not there are moats that will last or not.

He also added the following:

...anybody who does give you the answer is probably full of you know what.

Occasionally, certain tech stocks (incl. AAPL and GOOG) have sold at a big enough discount to my own (conservative) estimate of intrinsic value that I was willing to purchase some shares.

In other words, the price was such that there was a substantial margin of safety and not much had to go right.


Long position in AAPL and GOOG established at much lower than recent prices; no position in DJCO.

* Naturally, if the stock at some point sells for a premium to per share intrinsic value the plan to repurchase shares should be altered accordingly.

** From some excellent notes that were taken at the meeting. Well worth reading. Not a transcript.
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