The Lato Letter: Volume 3, Issue 9.

The Lato Letter: Volume 3, Issue 9.

To give credit where credit is due, the following analysis is based on the commentary by a gentleman by the name of Gary Morton who brought this line of thinking to me in an article that he wrote for the website “Seeking Alpha” on August 9, 2014.

Factoring in the 7 for 1 stock split in June 2014, Apple set a new all-time closing high yesterday with a close of $100.53, just shy of the all-time intra-day high of $100.72 set on September 21, 2012. However, as you are probably aware, Apple has added significant amounts of cash to its balance sheet since that time and has used some of that cash to re-purchase over 500 Million shares of its own stock.

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This accumulation of cash and retiring of shares impacts the “Enterprise Value” of the company. The enterprise value of a company is determined by taking the market value of the equity (shares outstanding X share price) plus the debt outstanding minus the cash and investments held by the company. Using the figures from the September 30, 2012 financial statements and the intra-day high on September 21, 2012, Apple had an enterprise value calculated as follows: shares outstanding (based on 7 for 1 split) of 6.568 billion X share price of $100.72 + zero debt – $121B of cash and investments = (6.568B x $100.72) – $121 B = $540.5B.

Using the figures from the June 30, 2014 financial statements Apple’s enterprise value from yesterday’s closing price is calculated as follows: shares outstanding of 6.052 billion X share price of $100.53 + $31.0B of debt – $164B of cash and investments = (6.052 X $100.53) + $31.0B – $164 = $475.4B.

Therefore, yesterday’s enterprise value is actually $65.1B less than it was at the peak two years ago. In other words to have the same enterprise value today, Apple’s stock price would have to rise over 10% to reach $111.28 per share.

The determination of a company’s enterprise value is a cornerstone of Padlock’s investment philosophy that when you buy a stock you are buying a piece of a business that you believe will be worth more in the future than what are paying to buy that piece of the business today. On that basis, if you believe that Apple today with its existing product line-up, its much anticipated new products, its new relationship with IBM and with several key new people in place to guide its future growth is only worth as much as it was two years ago, then its shares still have another 10% to go to reach the same enterprise value.

Obviously, if you believe Apple’s business today is worth more than it was two years ago, then the shares can still go much higher. That is the camp that Padlock is in.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change without notice.

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