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
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!