Apple becoming a bigger cash flow machine

Posted:
in General Discussion edited January 2014
Citing their belief that Apple's iPhone and free cash flow potential is even greater than investors realize, analysts from UBS Investment Research joined those over at PiperJaffray this week in raising their firm's price target on shares of the electronics maker to $160.



"We believe that free cash flow and deferred revenue will become more important metrics in driving Apple?s shares through fiscal 2008, perhaps eventually trumping the current quarterly frenzies over iPod and Mac unit sales," Ben Reitzes and his team of analyst told clients in a research note on Thursday.



The analysts say the company's focus on free cash flow growth should expand its price-to-earnings (PE) ratio, similar to events that played out at rival Dell when the PC maker's PE expanded from about 18x to about 30x at its peak in late 2003.



"This year, a free cash flow rebound has contributed to a 29 percent surge for shares of storage leader EMC as well," Reitzes wrote. "In Apple?s case, a free cash flow expansion could have similar results in our view."



Given that more than 80 percent of revenues from Apple's new Apple TV and iPhone products will show up as deferred revenue under Apple's new accounting principles, the analyst said free cash flow could evolve into a better indicator of the company's true "cash profit" once the iPhone translates to material value in the first fiscal quarter of next year.



On the other hand, the analyst said Apple TV may take another year or so to take hold given his view that iTunes will need to offer more films and even pay-per-view services in order for the solution to be attractive enough to compete more effectively with cable boxes and DVD players.



While Reitzes has not yet made material adjustments to his revenue or per-share estimates, he did raise iPhone unit estimates given indications that the product should be extremely well received in the U.S. and his view that build plans out of the supply chain look very compelling vs. unit estimates for sell-through in the second half of the year.



"We are establishing free cash flow estimates of $4.90 per share ($4.37 billion) for fiscal 2007 and $6.50 per share ($5.97 billion) for fiscal 2008," the analyst wrote in his note to clients. "These estimates factor in projected unit sales of 950,000 iPhones in fiscal 2007 and 8.1 million iPhones in fiscal 2008."



Given those estimates, Reitzes said Apple is undervalued on a free cash flow yield basis versus other growth stocks. He raised his price target on shares of the Cupertino-based company to $160 from $133.



"Our new price target is based on our view that within a year Apple should achieve a 4.5 percent free cash flow yield," the analyst wrote.

Comments

  • Reply 1 of 9
    anantksundaramanantksundaram Posts: 19,053member
    Ben Rietzes says: "We believe that free cash flow .... will become more important .... in driving Apple?s shares..."



    An analyst finally discovers "free cash flows" (FCF)?



    Sheesh. When are these guys going to figure out that EPS*(P/E) is just a back-of-the-envelope simplification of FCF discounted at the appropriate discount rate? (In other words, any detailed valuation of Apple should always have been based on its free cash flows, and therefore, it is not something that became suddenly important or trendy!).



    Aaaaaaargh....... sometimes, I really worry about these guys.
  • Reply 2 of 9
    plusplus Posts: 54member
    Quote:
    Originally Posted by AppleInsider View Post


    "We are establishing free cash flow estimates of ...." the analyst wrote in his note to clients. "These estimates factor in projected unit sales of 950,000 million iPhones in fiscal 2007 and 8.1 million iPhones in fiscal 2008."



    WOW!!! 950,000 million iPhones in fiscal 2007!! That's got to be the most optimistic projection anyone has published yet - more than 100 iPhones for each and every person on the planet ... and then some! Just THINK what this is going to do to the stock price when the word gets around!!!



  • Reply 3 of 9
    bageljoeybageljoey Posts: 1,752member
    Quote:
    Originally Posted by plus View Post


    WOW!!! 950,000 million iPhones in fiscal 2007!! That's got to be the most optimistic projection anyone has published yet - more than 100 iPhones for each and every person on the planet ... and then some! Just THINK what this is going to do to the stock price when the word gets around!!!







    I'm selling my house to buy Appl!
  • Reply 4 of 9
    mgkwhomgkwho Posts: 167member
    Quote:

    These estimates factor in projected unit sales of 950,000 million iPhones in fiscal 2007 and 8.1 million iPhones in fiscal 2008."



    Quote:
    Originally Posted by plus View Post


    WOW!!! 950,000 million iPhones in fiscal 2007!! That's got to be the most optimistic projection anyone has published yet - more than 100 iPhones for each and every person on the planet ... and then some! Just THINK what this is going to do to the stock price when the word gets around!!!







    Quote:
    Originally Posted by Bageljoey View Post


    I'm selling my house to buy Appl!



    That's what I wanted to say when the servers were down!



    AI, c'mon, how many times do we have to correct your articles?



    -=|Mgkwho
  • Reply 5 of 9
    Quote:
    Originally Posted by mgkwho View Post


    That's what I wanted to say when the servers were down!

    -=|Mgkwho



    You must have been heartbroken!



  • Reply 6 of 9
    kasperkasper Posts: 941member, administrator
    Quote:
    Originally Posted by mgkwho View Post


    That's what I wanted to say when the servers were down!



    AI, c'mon, how many times do we have to correct your articles?



    -=|Mgkwho



    Guys, it was a simple copy and paste of a quote. That's the way the analyst wrote it in the note to investors. I'm sorry we didn't catch it earlier. However, I appreciate you pointing it out.



    Best,



    K
  • Reply 7 of 9
    minderbinderminderbinder Posts: 1,703member
    Target of 160? Wow.



    I guess I'm not feeling so bad about buying at 80.
  • Reply 8 of 9
    irelandireland Posts: 17,547member
    Just as well I bought mine when they were worth sweet f-all.
  • Reply 9 of 9
    bwikbwik Posts: 562member
    Where were they in 2005 with this $160 forecast? Answer: Their 2005 forecast was dead wrong. Their 2006 forecast ($90?) was very probably also wrong. They are concerned that, again, they will be wrong. So they upped the forecast.



    Their track record has been consistently wrong through history, particularly in regard to AAPL. They have been too pessimistic. Instead, they should apologize for being such incompetent analysts. What basis to they have to make projections? This "target" is nothing more than conventional wisdom. Of course people expect AAPL to rise -- that's why it is where it is. Believe it or not, it could hit $300 within a couple years.



    Analysts' job should be to tell us the future. It is not good enough to tell us about the present -- we already know that. Instead, run the numbers on some various scenarios of market domination of cellphones circa 2009. What will AAPL be then? We all know free cash is slated to rise. It's baked into today's price. What we don't know is future strategic endeavors and pricing powers.
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