I read a lot about Apple (NASDAQ:AAPL). Regular Fools probably know by now that covering the Mac maker is my regular beat. As the world's most-valuable and most widely followed company, there's never really a shortage of Apple-related content either. Naturally, articles about investing in Apple have a wide range in terms of quality, everything from casual blogs to mainstream sites. There's also plenty of varying opinions about Apple's future prospects, both bullish and bearish. Generally speaking, I consider MarketWatch to be a fairly reputable site for market news and information.
That's why it was so disconcerting to see such a bizarre analysis of Apple there yesterday. MarketWatch columnist Brett Arends published an opinion piece entitled, "No, Apple isn't a slam-dunk." Let's not delve too deeply into the fact that I think Apple is bottoming out, presents a compelling buying opportunity, and the China fears are overblown.
I'm always happy to look at the flip side of the coin, so long as the thesis is intact. Arends' is not. Let's take a closer look at this "closer look at Apple."
See if you can follow along
Arends' "first issue" is Apple's cash position, which is often cited by bulls (like myself) as a positive factor. Here's the relevant section that I simply can't comprehend:
The first issue is Apple's cash pile. Everyone likes to focus on the $200 billion or so that Apple holds in bank accounts. That looks huge in comparison to the company's current $588 billion market value.
The problem is that little of this cash belongs to shareholders.
Apple says about $181 billion is held overseas to avoid tax. It would probably have to pay Uncle Sam about 35%, or $63 billion, if it brought that money home. Apple also has short-term creditors and long-term liabilities that need to be offset against assets.
What's the true picture? As of June 30, Apple had $239 billion in cash and short-term assets, less $147 billion in liabilities. That leaves a net $92 billion. Factor in the taxes from overseas profits and there would be just $29 billion left over for investors — $5 a share. Big deal.
Where do we begin?
All your cash are not belong to us
Let's go with the part about Apple's cash not belonging to shareholders. Apple's cash does belong to shareholders, even if it's located overseas. Just because Apple chooses to keep cash overseas to avoid repatriation taxes doesn't mean that it doesn't belong to shareholders. That's like saying money kept in a hard-to-reach pocket is no longer yours, even if you're wearing the pants (which is more reason not to wear cargo pants).
This implies that only Apple's domestic cash "belongs" to shareholders, and by extension Apple's international operations that generate all that foreign cash have no value. Um, ok.
The next part is even more confusing.
A truer "true picture"
Arends then takes a cursory glance at Apple's balance sheet and paints a gloomy picture. He takes total cash (including long-term investments) and current assets, and then subtracts total liabilities to arrive at a "net $92 billion." The explanation does not make sense.
In general, comparing current assets to current liabilities is not misplaced. This is what the current ratio (current assets divided by current liabilities) and working capital (current assets minus current liabilities) metrics are for: they give investors an idea of a company's short-term liquidity and solvency. But why would you essentially compare current assets (if you include all of Apple's cash) to total liabilities?
Arends cites "short-term creditors" that presumably need to be paid off, among other things. But do you know what else is included in Apple's total liabilities? Things like deferred revenue, which is just revenue that's sitting on the balance sheet waiting to be recognized over time (mostly for things like free software updates that Apple must assign an accounting value), which is now $12.6 billion. It's not like Apple actually "owes" that money to customers who have already purchased products. Even products that are returned are included in the valuation allowance that's within cost of goods sold on the income statement.
Mr. Cook already went to Washington
As for the hypothetical $63 billion deduction for "taxes from overseas profits," which is what Apple would owe if it chose to repatriate 100% of its $181.1 billion for no apparent reason, that'll never happen. The whole reason why Apple uses debt in the first place is to avoid that scenario, which I should mention comes at no net cost since Apple's other investment income pays the interest bill.
Along with other major multinationals, Apple has been lobbying Congress for a tax holiday; there are a few bills floating around, but acts of Congress aren't known for their agility. Tim Cook made it clear when Congress grilled him in 2013 that Apple is very willing to pay a repatriation tax -- so long as it's "reasonable" enough to allow "free movement of capital back to the U.S." The current 35% rate is not reasonable, nor is it competitive with other developed countries. Cook said a rate in the "single-digits" would be reasonable.
The point here is that Apple isn't going to suddenly and arbitrarily repatriate 100% of foreign cash, undermining its entire debt strategy and cutting a $63 billion check to Uncle Sam, which incredibly would not bounce (Apple hates those $25 returned check fees).
Besides, the majority of Apple's capital expenditures these days are overseas, where it invests in manufacturing equipment located within partner facilities, so that foreign cash does have a use abroad.
As much as Congress hates it, legal tax minimization is a part of maximizing shareholder value.
I'm still confused
This dizzying analysis arrives at "$29 billion left over for investors -- $5 a share," and frankly I don't even know what that figure is supposed to represent. Is that some new non-GAAP version of book value if long-term assets evaporated and management went insane? Is that the portion of Apple's cash that actually belongs to shareholders? More importantly, which pocket is that $5 in? I already warned you about the dangers of cargo pants.
There are plenty of other holes in the analysis, such as the decline of subsidies (Cook has explicitly said the transition to early upgrade and installment plans is accelerating upgrade cycles in developed markets) and the commodity nature of smartphones (Apple's pricing power is getting stronger, with ASPs jumping $99 last quarter), but I can't get past the balance sheet analysis.
Oh well. Another day, another critique that doesn't stand up to scrutiny. Big deal.