I often review analyst reports on companies. Those reports are, more often than not, overkill on information. Picture it this way. Think of the Bose ad where the speakers blow the hair back of the guy sitting in a chair.
Like many things in life, the 80/20 percent rule is firmly in place. Eighty percent of what you need to understand can be found with 20 percent of the information. Stocks like most everything else are subject to this rule called the Pareto rule. Sometimes there are reasons to dig deeper into certain numbers, but usually too much information is simply …. too much information.
Like Thoreau said, “Simplicity, simplicity, simplicity! I say, let your affairs be as two or three, and not a hundred or a thousand; instead of a million count half a dozen, and keep your accounts on your thumb nail.”
Take Apple, the simple thesis of why to own it is people in that eco system love it and are very unlikely to leave it – ever. All their products are designed to tightly integrate and be used effectively with little ramp up time. Moreover, it works all the time, unlike Microsoft’s crap.
Using the Pete Lynch method (of Fidelity fame) of personal observation, have you seen how many people you know that have bought Apple watches this holiday season? The quarter from Oct to Dec is their first fiscal quarter and is always their biggest quarter. Apple’s trailing PE is only 12.6! Very reasonable.
Sure their phones are getting pricey with Apple’s latest models. Many of their customers will stop buying them as regularly as they had in the past, but they will still buy - only waiting longer between purchases. China is an issue too, but then, most every company doing international business also has that problem. Do you think it is being addressed? Damn right it is!
Apple is a mature company and not the growth juggernaut they were up until 2012. Like a late teen, their high growth spurt is done. They will now start to grow slower but the growth will still be steady for some time. This is exactly the type of company that Warren Buffett covets.
Attached are some simple charts to get your mind around why Apple is a great buy. Here is what I see.
- Sales as George Jefferson would say from the old Jefferson’s sitcom are “moving on up!” It slowed a bit in 2016 and 2017 after a robust 2015, but 2018 (ended 9/30/18) rocked it.
- Net income shows a pattern similar to sales. 2013 and 2014 slowed a bit after a robust 2012. 2015 was robust and it slowed down a bit in 2016 and 2017 followed by a robust earnings in 2018.
- Return on sales (ROS) has been steadily over 20% since 2010 (Net Income/Sales).
- LTD to Equity has increased to almost 1 to 1. While higher than I would like, a company with significant growth and a loyal customer base should have no problem servicing this level of debt.
- Apple is steadily investing in their business with capital expenditures being more than their depreciation and amortization.
- Return on equity was a whopping 55% in 2018 and has been over 30% since 2011. Return on capital (LTD and Equity) is good but lower than ROE indicating they are using debt very effectively. ROC is almost half of their ROE! Now that is effective use of OPM (other people’s money – LTD).
- Finally, per share diluted earnings are increasing at an outstanding rate. A good portion comes from return on sales, but also through smart management of their capital structure (LTD to equity)
There you have it. That, my friend is why Warren Buffett is all over Apple like a cheap suit. I can see him in his office in Omaha right now, just smiling away and reading a 10K. Sounds like fun!
When making products or investing, always remember, “Simplicity, simplicity, simplicity….. “
