Apple Inc. (AAPL) on Joel Greenblatt’s ‘Magic Formula’ Screen

Page 1 of 2

GOTHAM ASSET MANAGEMENTApple Inc. (NASDAQ:AAPL), Oracle Corporation (NASDAQ:ORCL) and Microsoft Corporation (NASDAQ:MSFT) are all very large cap tech stocks.  Some have been more interesting than others in recent years (ie Apple compared to Microsoft).

However, all do well when screened against the concept of Joel Greenblatt’s Magic Formula.  The idea of Magic Formula Investing is to buy stocks that are relatively cheap with high earning yields (EBIT/Enterprise Value) and returns on capital (EBIT/(net fixed assets + working capital).

Earnings Multiples and Return Metrics Indicate Apple Inc. (NASDAQ:AAPL) is Most Attractive

In the following chart, a look at each stock’s earnings for FY13 and FY14 shows high single digit (Oracle) to mid-teens earnings (Apple Inc. (NASDAQ:AAPL)) growth for these stocks.  While Apple has the highest ROA, ROE and earnings growth, it trades at a discounted multiple of 10.3x and 9x FY13 and FY14 consensus earnings, respectively, relatively in line with Microsoft but below Oracle.  This could indicate it’s a relative value.  On the other hand it may have lower quality earnings, belief that consensus will be revised downward and/or earnings growth for Apple Inc. (NASDAQ:AAPL will retreat following FY14.

Magic Formula Points to Apple

The evidence also points to Apple as the best value based on Greenblatt’s Magic Formula.  Both Apple and Microsoft have a similar TTM earning yield, 14.1% and 14.4%, respectively.  That said, Apple has by far the largest return on capital, largely due to their negative working capital.  Apple is the only manufacturer of hardware, but they heavily outsource this.  Due to their size and position in the market, their payable terms with suppliers are very attractive and account for their negative working capital position.  Also, similar to the P/E multiples, Oracle trades at a premium to Apple and Microsoft.

Oracle Corporation (NASDAQ:ORCL)

The case to own Oracle includes a few keys.  First, management has focused on shifting hardware sales to its higher margin products.  Margin improvement and a shift to growth in hardware in FY13 would be positive for the stock.

In their database and applications business, Oracle can gain share from International Business Machines Corp. (NYSE:IBM) and SAP AG (ADR) (NYSE:SAP) driving additional growth in this business.  Oracle is also positioned to benefit from increasing use of the Cloud with over 100 enterprise applications and its use of a subscription-based pricing.

All of this can drive further improvements in margins and earnings growth.  While its valuation indicates it is more expensive than Microsoft and Apple, it is still attractive for a hardware and software firm with an outlook for steady earnings growth.  Oracle has fewer concerns with future earnings than Microsoft or Apple, also contributing to its premium valuation.

Microsoft Corporation (NASDAQ:MSFT)

While the PC market is soft, demand for Microsoft’s enterprise products remains stable.  Microsoft has lacked significant exposure to faster growing markets, like tablets and smartphones, but it is trying to change this.  While initial Surface (tablet) and Windows 8 tablet sales are below expectations, it is still early and Microsoft can steadily gain penetration into this market.

Also, the Windows phone will likely contend with the Research In Motion Ltd (NASDAQ:BBRY) BlackBerry 10 for third place in smartphone market.  Interest is increasing for their Cloud products as well.  If Microsoft can gain traction into one of these higher growth markets, upward earnings revisions by the Street are likely to drive the shares higher.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Famous Gay Athletes

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!