Does Apple, Inc. (NASDAQ:AAPL) Show Statistical Evidence Of An Economic Moat? Our Quantitative Value Model Applied

By GREENBACKD

We wrote an article for the April issue of Value Investing Letter giving an overview of Quantitative Value, discussing the quantitative value model outlined in the book, and applying it to Apple Inc. (AAPL). It’s been smashed up since then, and there was also some big news yesterday — which is that AAPL is going to return $100 billion to its shareholders by the end of 2015 – so I’m highlighting it here. To put that $100 billion capital return in context, AAPL closed Tuesday with a market capitalization of $380 billion. Incredibly, its $145 billion cash pile won’t shrink because the new buyback brings its return of capital up to about the level of its current free cash flow. Weirdly, it’s now regarded as the “animal investors like least: a slow-growing tech stock.” From our earlier article:

We ran our model on March 13, 2013, finding Apple Inc. (AAPL) to beone of the highest quality stocks in the bargain bin. AAPL designs, manufactures and markets a variety of mobile devices, including the iPhone, iPad, and iPod, along with Mac products, operating systems, cloud products, related software and services, and many other products. Its devices are ubiquitous, and are catnip to consumers, driving one of the most valuable brands in the world. Why has the company shed over a third of its market capitalization since peaking near $700 per share in September of 2012?

In short, this former hedge fund darling has become the company that everyone loves to hate. iPod and Mac sales are down from last year. The media has pounced on reports of weakness in the sale of the iPhone 5 and now questions whether AAPL will be competitive with the newest smartphones. The market did not react well to AAPL’s latest earnings announcement, and dozens of analysts have reduced their price targets over the past few months. So what’s going on here? Is AAPL again headed for the technology dustbin of history? Or might this be a manifestation of investors’ behavioral bias?

Our model leads us to believe that AAPL offers exceptional franchise characteristics and is statistically cheap, with an EBIT/TEV yield of nearly 21 percent, which is among the very cheapest within the cheapest decile of stocks in the market.Below are some additional highlights from the quantitative output of our screens, which will give the reader a high-level view of the company’s profile, and then we will dig deeper on some details. Clearly, the fact that Mr. Market is offering us a company of this quality at this price should raise some questions.