Apple vs. Starbucks

For the first time ever, all four top-seeded teams -- Memphis, Kansas, UCLA, and North Carolina -- are in the Final Four of the men's NCAA basketball tournament.

Don't read too much into that. Massive upsets often happen in the tourney, but, more often, the top seeds advance. There's a reason for that: They're the best teams.

That's what we have in today's showdown between Apple (Nasdaq: AAPL) and Starbucks (Nasdaq: SBUX). Apple is simply better:




Return on capital



Return on equity



Trailing 12 months. Source: Capital IQ, a division of Standard & Poor's.

The very best value stocks are often like that. Misunderstood multibaggers whose real worth is best measured by their extraordinary advantages.

A caffeinated fruit
Four product families are providing much of Apple's caffeinated growth:

1. The Mac. Growing by roughly 42% and an $11.5 billion business over the trailing 12 months.

2. The iPod. Growing by close to 8% and responsible for $8.9 billion in revenue over the trailing 12 months.

3. The iPhone. Growing by more than 100% and responsible for $359 million in revenue in its first two quarters on sale.

4. iTunes. Growing at 31% and responsible for $2.7 billion in revenue over the trailing 12 months.

We can't know, exactly, what all that's worth. But Apple's peers are surprisingly helpful in creating a proxy. For example, Dell (Nasdaq: DELL) mostly mirrors the Mac business. SanDisk (Nasdaq: SNDK) approximates the iPod unit. Research In Motion (Nasdaq: RIMM) represents what the iPhone segment hopes to become. And (Nasdaq: AMZN) and Netflix are, respectively, the yin and yang of iTunes.

Here's what this group is worth right now:


Market Cap (billions)





Research In Motion








Source: Yahoo! Finance.

I won't try to convince you that Apple's four top business units are worth $151 billion in market value. Dell is the PC market share leader. Amazon is one of the world's largest retailers.

But Apple's $132 billion market cap includes not just its core segments, but also:

  • $3.1 billion in software and peripherals sales.
  • $18.4 billion in cash and investments.
  • $1.9 billion for the fair value of depreciated property and equipment.

Add all that up. Subtract it from $132 billion. What you're left with is $108.6 billion for four very-high-growth businesses.

Put differently: Even if you don't think the Mac business is worth $43 billion, as Dell is, it'd be unfair to conclude it's worth much less. Dell is losing PC market share; Apple is gaining. Mac sales are up more than 40%; Dell's top line is up just 6.5% over the trailing 12 months.

It's no leap to say Apple's Mac unit -- its legacy business -- is worth at least $33 billion, or close to a third of the market value attributable to its four core businesses. Can you really call that fair? I can't. There's too much growth still to be had.

Mmmm ... brimstone-flavored coffee
Surely my friend and editor Joe Magyer will continue to place his faith in CEO Howard Schultz. Fine. Just remember that it was Schultz who questioned whether Starbucks was losing its soul. Acts of atonement have barely begun and once-loyal customers may never forgive.

Capital, too, is more of a problem than it used to be. Starbucks carries more than $1 billion in debt versus $535 million in cash and investments. That's a recent development. From 1998 to 2005, the coffee king was producing more than enough capital to fund growth organically.

Apple, by contrast, has $18.4 billion in cash and investments at its disposal. It's a defensive stock whose flush coffers provide shelter against the credit crunch. Shelter that Starbucks doesn't possess.

If, as I do, you expect the iEmpire to put its superior resources to good use -- as its 23.2% trailing return on capital suggests it will -- then go to Motley Fool CAPS and rate Apple to "outperform." If not -- if you think Schultz can hit the 30-footer -- choose "underperform." Our CAPS team will tally the votes after the polls close.

Who's going to take home the trophy? View the rest of the bracket.