Mav’s $AAPL Maths 101: 2016 Price/Earnings Multiple Calculation, Assuming No Share Price Change, “Normal” + Ex-Cash

I know a few of the arguments against the price/earnings ratio, so I won’t waste words debating them here.

“In the Present” Preliminary Reference Notes:

As of today, Apple’s ttm P/E is (based on Apple’s 10-Q filing of 5.77B diluted shares outstanding) $655.18B est. market cap / $50.737B ttm earnings = 12.9. Where Yahoo! Finance gets its 13.13 and Google Finance its 13.11, I’m not exactly sure, but close enough. Net out Apple’s $149B in net-of-debt cash, and the current ex-cash P/E is around 10, give or take a few percent.

Step One: The Forward P/E

AAPL last closed at $113.49. We’ve gone from Calvin Harris (feat. Kelis) (“Bounce”) to Ella Henderson (givin’ up the ghost) in one day’s time. What next? A Panic! at the Disco? Well…given that pre-market price action…

Full fiscal year (FY) 2016 estimate courtesy of the 47-member Yahoo! Finance (professional) analyst consensus: $9.78 (you’ll see how amusing this number is later on)

Forward P/E (Sep. 2016 FY-end basis, in practical terms, “as of around the late October 2016 FQ4 earnings release”): around 11.6.

Step Two: Ex-Cash Forward P/E

Cash Estimate

Well, to figure out the ex-cash circa. Sep. 2016 P/E, let’s wild-guess what Apple’s cash balance might be in around one year’s and a few weeks’ time.

Apple’s cash balance net of debt is currently $149B. Apple should generate greater than $50B in cash this fiscal year and (yes, I’m calling it now) the next. How do I know this?

Well, as of the end of FY 2014, Apple had $120B net of debt (let’s just assume Apple won’t be paying its hard-borrowed cash back anytime soon – why would it?). We’re $29B north of there:

  • with $22B in share repurchases through FQ3 2015
  • with $8.6B in dividends paid
  • with $7.6B in PP&E purchases (Apple 10-Q, FQ3 2015, pg. 6)
  • with $10.6B in cash (income) taxes paid (same)
  • with $1.3B in taxes paid related to net share settlement of equity awards (same)
  • with $427M paid in interest (seems almost trivial by comparison, doesn’t it) (same)

That’s a grand (sub)total of $50.5B in outflows through three fiscal quarters. Sure, there’s probably some significant counterbalancing inflows not listed here, but – you get the picture, I think. Given all this, I’ll wild-guess a basically static cash balance of $150B.

Share Repurchase Estimate

Seems pretty conservative, even if you add:

• a dividend increase (10%, call it $1-1.5B year-over-year increase in dividend expense?) and

• a faster-than-this-year’s-pace of buybacks I’m projecting ($38B, net of $3B or so share-based compensation expense) if AAPL Silly Season continues much longer – “unlikely”, but you never know.

That $38B is itself fairly conservative when you consider that Apple is due to repurchase some unknown billions of stock for FQ4 2015 – don’t think it won’t take a serious look at buying “more than it otherwise might” during this latest selloff.

Subtract the $38B in net share settlement from Apple’s current ~$655B market cap and you get a 5.8% share reduction, to 5.435B or so diluted shares outstanding versus 5.773B or so now (the most recent share-weighted data point).

FY 2016 EPS Projection

Let’s run a zero-growth baseline just for kicks. Meaning we (1) accept analysts’ FY 2015 EPS projection – which Apple should get to, absent something actually apocalyptic happening to the yuan – say somewhere north of 10% devaluation impact in a quarter, which Apple cannot mitigate with its world-class hedging program, and a ripple/shock effect on consumer spending, both of which seem…premature to call as of today. Then, (2) since we’re assuming zero growth from Apple (oh, people will start thinking that, just you wait), just subtract the net buyback amount to get the fully-financially-engineered FY 2016 EPS number.

FY 2015 Yahoo! Finance consensus EPS: 9.13

Divide by .942 (5.8% share reduction) to arrive at:

FY 2016 EPS: $9.69, also known as nine cents or one percent below the 9.78 analyst consensus. What a coincidence.

~$655B – $150B net cash = ~$505B

Given $113.49 share price:

Forward P/E: 11.7

Ex-cash P/E: *9.02*

Well, if you really want to turn on the pessimism and ignore the significant valuation backstops added since then (from share splits to capital return to Uncle Carl Icahn), Apple’s ttm P/E went to 10 (maybe a bit low briefly)? during the Dark Times of late 2012 to mid-2013.

That’s, what, another 20% or so drop from here? To…$520B or so market cap?

If I had to guess, Apple, with its $150B in net reserves, would not mind racing to retire another 10% of its shares (with an accompanying $1B+ in dividend payout savings per year) if the right opportunity presented itself. It’ll be fascinating enough just to see what Apple does in the next few weeks before quarter-end. As long as the fundamentals hold up, a swoon for investors could well be a boon for the company.


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