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Apple: It May Be Too Late To Take A Bite


If the Bush Twins, Barb and Jenna, accessorize with iPods, as some gawkers said they had amid Daddy's inaugural celebrations, does that make the iPod more cool, or less? What about President Bush himself, who was seen iPoding late last year as he went for a bike ride? Did that spur iPod's monster holiday sales?

Silly questions, yes, but they are some of what now passes for investment analysis of Apple Computer (AAPL), maker of the iPod line of music players and the stylish Macintosh family of computers. Lately hitting a new high above 77, stock in Apple is not just high-priced -- 37 times this year's estimated profit -- but high-fashion. Which got me wondering: Besides a reflected glow as part-owner of today's most glamorous gadgeteer, what does 77 a share get an Apple buyer?

Let's go first to the balance sheet. Impressively, 28 years since incorporating, Apple has no debt, long- or short-term. At last report, it had just $8.52 a share in total liabilities, mostly accounts payable. Those liabilities are easily covered by $22.34 in assets, including no less than $15.39 a share in cash and short-term investments. All in all, Apple's stated net worth is $13.82 a share. That probably undervalues Apple's real estate, which includes its Cupertino (Calif.) headquarters, plus plants in Sacramento and Ireland. Adjusting generously, we can guesstimate that one share contains $20 in net assets.

For a buyer of Apple at 77, that leaves $57 to wonder about. Business could hardly be better: In the past four quarters, sales grew 45%, to $9.8 billion, as net more than tripled, to $508 million, or $1.28 a share, according to the Capital IQ, a division of Standard & Poor's (MHP). With new products such as the $99 iPod shuffle and the $499 Mac mini winning rave reviews, bulls see Apple blowing away Wall Street's consensus estimate of $2.05 a share in the next four quarters. Suppose it does, earning $2.45, the mean estimate not for calendar 2005, but for 2006. That still leaves Apple trading at 31 times earnings, vs. 26 for Dell Computer (DELL).

Does this mean investors won't keep paying 31 times extravagant estimates of future profits? No. But it's worth recalling what happened to eBay (EBAY), another great company whose shares went in weeks from 118 to 80 on hints of slower growth. Were something similar to befall Apple, all the cash on its balance sheet would act as a cushion. But that cushion is not as cushy as it was. Apple closed fiscal 2002 with enough cash per share to cover 82% of its stock price. The next year, the figure was 57%, and it was 35% last September at the end of fiscal 2004. Today, cash per share comes to less than 20% of Apple's stock price.

There is a season when investors who appreciate risk get stakes in technology stocks. A case in point is Private Capital Management, a $25 billion Naples (Fla.) firm that since 1986 has rolled up annual average returns of more than 20%, vs. less than 12% for the S&P 500-stock index. Back in late 2000 (when Apple's cash covered 78% of its share price), PCM began buying Apple. It owned more than 6% a year ago. Then, as the stock took flight, PCM became a seller. CEO Bruce Sherman told me that PCM must show its year-end position in a public securities filing due in mid-February. Apple doesn't tempt me. If it did I would be more interested in that filing than the First Family's latest gadget.

By Robert Barker


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