August Tranche - AAPL, ABT and BAH

 AAPL - where to start?  I have discussed this stock many times on this blog.  Frankly, I have yet to be proven correct by appreciation in stock price.  They are my largest single holding.  I have shares in two MFI tranches and in my dividend portfolio.  All three pieces are under-performing.  I know enough to know those facts do not make it a bad buy.  We all know the anti-Apple arguments by heart.  Innovation is dead, Margins are pressured, They are turning into Microsoft, etc, etc, etc.  I like to step back and ask the simple questions: (1) are they cheap? and (2) are they a good company?

In past four quarters, they made $52b in operating income. Think about that versus a market cap of $375b.  In eight years, they could buy themselves just out of operating income assuming no growth. But wait, they have another $39b of short term/cash and $105b of long term investments.  So if you back out the amount they do not need for day-to-day operations (excess cash), you are likely getting closer to $250b.  So if you used excess cash and operating earnings, AAPL could buy itself in five years.  The list of companies that could buy themselves in 5 years (essentially a 20% earnings yield) is exceedingly short. Out of over 2,000 stocks I look at, only 42 others meet that hurdle.

Ticker	Rank	Stock Price	Market Cap	Earnings Yield
XIN	1	4.39	317	3246%
NSU	2	3.64	729	61%
NTE	3	7.50	343	52%
BPI	4	12.81	705	52%
ESI	5	23.97	563	48%
STO	6	22.52	71,654	40%
NTL	7	17.04	1,817	38%
KLIC	8	12.40	949	36%
APOL	9	19.99	2,260	34%
HFC	10	49.50	10,109	34%
TGA	11	7.37	606	31%
SPLP	12	13.60	411	31%
TEO	13	15.16	2,985	31%
RRGB	14	52.51	753	29%
EGY	15	6.12	362	29%
CYD	16	16.40	611	27%
PDLI	17	8.25	1,230	27%
UIS	18	20.65	910	27%
IDCC	19	45.97	1,891	27%
VIV	20	24.71	18,333	25%
CYOU	21	30.75	1,644	25%
DK	22	36.03	2,185	24%
WNR	23	33.37	3,641	24%
CVI	24	62.81	5,454	24%
IAG	25	5.28	1,990	24%
CF	26	190.96	11,992	24%
CTB	27	25.84	1,659	23%
GAME	28	4.12	1,113	23%
SLT	29	6.62	5,563	23%
ALJ	30	18.31	1,238	22%
CJES	31	18.60	1,024	22%
AAPL	32	396.00	374,630	22%
RIOM	33	2.94	529	22%
PZE	34	4.22	852	22%
SIMO	35	11.26	383	21%
CEO	36	173.84	77,894	21%
VLO	37	40.63	22,590	21%
TSO	38	61.65	8,606	21%
MPC	39	82.50	27,473	21%
E	40	45.31	82,075	21%
XLS	41	12.15	2,306	21%
PWRD	42	15.43	751	20%
MRO	43	34.39	24,486	20%

Looking through this list, you'd see a chunk of Chinese companies, fir-profit education and refiners.  Many of those, you could rightfully question future earnings streams. I am of the opinion that AAPL's stream is sustainable. Even if it does not grow, this is a very cheap company.

Then are they a good company?  You can argue all day about their moat.  But one measure of a good company is return on equity.  Another is scalability. You can think about recurring income streams. You can think about stickiness of products.

By ROE measure, they are beyond good... they are great.  They generate a lot of income without huge investments (on a relative basis).  Think about AAPL versus the refiners on the list above.  For a refiner to double their income (assuming prices are constant), they have to double output. Many refineries are running at maximum capacity, so they would have to build an entire new refinery.  That is capital intensive and takes years.  AAPL could just enter a new market with their products; requires minimal capial but could add significant revenues.  New products require more investment obviously, but many of those will be a step or two forward from what is out there.

Conclusion - I am still a fan.

ABT - Abbott spun off into two companies a year or so ago.  The first step for me is to ensure the numbers I am looking at historically are just the ABT component (excluding ABBV). Hmm, looking at Fidelity, I get operating income of $8.5b for past 12 quarters.  The most recent quarter (first since the split) was $614m.  I am pretty sure the $8.5b is inflated for the two companies combined.  I am striking ABT off my list.

BAH - (humbug).  Sorry, could not resist.  This is Booz-Allen, a company that has been tangentially in the news of late (and not in a good way).  Catch-me-if-you-can, Edward Snowden, used to work for BAH (Snowden says got Booz Allen job for access to NSA programs). On June 6th, the first leaks were published. On June 9th, he went public saying it was him.  On June 6th, BAH was trading at $17.82. By June 12th, they dropped to $16.54.  Since then they have rebounded a bit to $17.38.  BAH provides consultant services, largely to the Fed Govt, much like SAI.  They seem to have a pretty steady income stream, in the $110m range each quarter.  They are at risk (somewhat) of lowered income due to sequester or loss of faith due to Snowden.

Looking at their balance sheet, they do have a lot of goodwill there.  Of $3.2b of assets, almost 50% ($1.5b) are intangible. Stockholder equity is only 226m (even with the intangibles) and is -1.2b when you look at tangible stockholder equity.  Yuck!  Next!

So of the first three here, AAPL is only one to go to next round.