- Warren Buffett writes that he's been exclusively following Benjamin Graham's Value Investing framework for 57 years.
- The analysis for AAPL nicely illustrates the selectivity of Graham's framework, which is also the secret of its extraordinary effectiveness.
- AAPL qualifies under Graham's index investing category today, especially since it's the largest component of the S&P 500 index.
Warren Buffett, in his 2008 foreword to Benjamin Graham's book Security Analysis, wrote:
My intellectual odyssey ended, however, when I met Ben and Dave, first through their writings and then in person. They laid out a roadmap for investing that I have now been following for 57 years. There's been no reason to look for another.
(Dave Dodd was Ben Graham's protégé, and later his co-author for Security Analysis.)
In 2012, we saw How To Build A Complete Benjamin Graham Portfolio. Today, we'll apply Graham's framework to Apple Inc.
Apple is a American technology company that is known for designing and selling consumer electronics, and holds near iconic status in the business world.
Graham holds a place that is just as iconic in the investing world, if not more so. Two of Graham's students — Warren Buffett and Irving Kahn — named their sons after him.
Graham recommended five major investing strategies — Index, Defensive, Enterprising, NCAV and Special Situations — depending on the kind of investor one was. Index investing was for the most passive investors, while Special Situations was only meant for the professionals.
In this article, we'll look at some of Graham's strategies to see if Apple would qualify for investment under one of them.
We'll start by evaluating Apple against Graham's 17 rules for Defensive, Enterprising and NCAV investment.
For the most recent numbers, please see the automated analysis for Apple Inc (AAPL).
Given below are Apple's Sales and Balance Sheet figures used to calculate some of its Graham Ratings, and its Net Current Asset Value (NCAV / Net-Net).
- Annual Sales: $229,234.00 Million
- Current Assets: $128,645.00 Million
- Intangibles: $8,015.00 Million
- Goodwill: $5,717.00 Million
- Total Assets: $375,319.00 Million
- Current Liabilities: $100,814.00 Million
- Long Term Debt: $97,207.00 Million
- Total Liabilities: $241,272.00 Million
- Shares Outstanding: 5,251.70 Million
Note: Graham analyses are done exclusively with annual data.
Per Share Values
Given below are Apple's BVPS, TBVPS and EPS values used to calculate its Defensive Price (Graham №) and Enterprising Price (Serenity №).
- Book Value Per Share: $26.15
- Tangible Book Value Per Share: $24.59
- Earnings Per Share (EPS): $9.21
- EPS - 1 Year Ago: $8.31
- EPS - 2 Years Ago: $9.22
- EPS - 3 Years Ago: $6.45
- EPS - 4 Years Ago: $5.68
- EPS - 5 Years Ago: $6.31
- EPS - 6 Years Ago: $3.95
- EPS - 7 Years Ago: $2.16
- EPS - 8 Years Ago: $1.30
- EPS - 9 Years Ago: $0.97
Defensive Graham investment requires 10 years of uninterrupted positive earnings. Enterprising Graham investment requires 5 years of uninterrupted positive earnings. NCAV Graham investment requires 1 year of positive earnings.
Using the above figures, we get the following Graham Ratings for Apple.
- Sales or Size (100% ⇒ $500 Million): 45,846.80%
- Current Assets ÷ [2 x Current Liabilities]: 63.80%
- Net Current Assets ÷ Long Term Debt: 28.63%
- Earnings Stability (100% ⇒ 10 Years): 100.00%
- Dividend Record (100% ⇒ 20 Years): 35.00%
- Earnings Growth (100% ⇒ 33% Growth): 1,526.10%
- Graham Number(%): 43.01%
- NCAV or Net-Net(%): 0.00%
- Equity ÷ Debt (for Utilities and Financials): 55.56%
A Defensive Graham grade requires that all ratings — except the last three — be 100% or more.
An Enterprising Graham grade requires minimum ratings of — N/A, 75%, 90%, 50%, 5%, N/A, N/A, N/A and N/A.
An NCAV (Net-Net) Graham grade requires a minimum Earnings Stability of 10%.
Apple's Intrinsic Value here would be the price corresponding to its Graham Grade — Defensive, Enterprising or NCAV.
- Defensive Price (Graham №): $72.42
- Enterprising Price (Serenity №): $52.13
- NCAV Price (Net Current Asset Value or Net-Net): $0.00
- Graham Grade: Ungraded
- Intrinsic Value: $0.00
- Previous Close: $168.38
- Intrinsic Value(%): 0.00%
But since Apple does not clear Graham's qualitative criteria for the Defensive, Enterprising or NCAV investment grades, no Intrinsic Value can be assigned.
This does not make Apple a bad investment though.
Apple instead qualifies for investment under Graham's index investing category (strategy #1 in the portfolio link above) being a constituent of multiple major indices; including but not limited to the Dow Jones Industrial Average, the S&P 500 and the S&P 100.
This conclusion is additionally borne out by the fact that Apple is the largest component of the S&P 500 index which is weighted by free float market capitalization (unlike the older Dow Jones Industrial Average which is simply price-weighted).
Apple may additionally qualify under Graham's Special Situations category (strategy #5 in the portfolio link above) but that is a topic for a whole other article. The Graham Ratings section above gives a good overall picture of Apple's Margin of Safety as well.
Seth Klarman, in his 2008 preface to the sixth edition of Graham's book Security Analysis, wrote:
The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning in 1934 with the first edition of Security Analysis.
The analysis for Apple nicely illustrates the versatility and selectivity of Graham's framework. This selectivity is also the secret of its extraordinary effectiveness, that has caused generations of investors to swear by it.
"Spinoza’s concluding remark applies to Wall Street as well as to philosophy: “All things excellent are as difficult as they are rare.”"