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Thursday, July 17, 2003 7:00:51 PM
One thing the major mutual funds, and other sophisticated buyers and sellers always calculate is a separate operating p/e. Typically, they will separate out book value from the value of operations.
The growth in value of assets (aside from real estate in the case of companies that have lots of that), is typically extremely limited. So real growth potential comes from the ability of the enterprise to grow.
In Apple's case, the way to do this is literally slit the assets of the company into two pots - the cash and everything else. Let's say you own 10,000 shares of AAPL (please grant me for purposes of illustration, the latitude to refer to AAPL as selling for $20 so I can round the numbers). With roughly $12/shr. in pure cash/net tangible assets that are not employed in the business of making and selling computers or anything else to do with Apple's enterprise, you can say 60% of your shares are "cash shares" and the other 40% are "enterprise shares".
What kind of price/shr growth should you see in those 6,000 shares of AAPL-cash? Well, exactly what the interest rate on cash is. About 1% a year the way Apple has it invested now, and maybe as high as 3%-4% in a few years. But the basic idea is that 5 years from now, those shares should probably sell for roughly 10% more than you'd pay for them today.
What kind of price/shr growth should you see in the 4,000 shares of AAPL-enterprise? Well, provided a constant p/e, you should expect them to grow at exactly the same rate as earnings grow at.
The reality is, there's no chance these shares will grow at the rate of EPS, because the market is granting a very high p/e that will ironically compress even as earnings begin to grow.
In order to know what enterprise earnings are now, you'll need to go to the financials and pull out the interest income and see the business is earning on its own. Then go back to 1998 or 1999 and do the same. See what Apple was able to earn in good economic times (exclusive of interest income), and figure that in a couple years, it should be able to do that again (thinking optimistically). Then plug in whatever p/e you think AAPL should be valued using in a couple years, plug in the operational earnings number you think it could produce once we're in better times, and divide by the share count you think we'll see (ah, back to that whole options thing again).
Then the question becomes, are you willing to accept a 10% gain in 5 years on 60% of your investment in order to get whatever you calculate you'll get as a return on the other 40%.
Sure, in the near term a stock can do just about anything. But over the longer haul, these metrics are what you'll use to project valuations.
good luck.
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