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Is Apple an A1?

Is Apple an A1?

Did you buy an iPhone between October 2007 and December 2009? Over 41 million people did. Maybe you and 1.7 million others queued outside an Apple store because you had to have the new iPhone 4 in its first week of release, or you are one of the 45,000 people per day buying an iPad? The numbers are astounding.

If you are like Forrest Gump of River Road, Greenbow Alabama, who owns Apple shares, and even if you are not, you may be interested in my estimate of the company’s intrinsic value.

For those faithful to the PC, your loyalty may soon be tested. Apple’s strategy of dominating the home entertainment market is converting the world to its products, and is eating into the business world too.

While the number of sales are amazing are they enough for Apple to replace Microsoft? In the fast changing world of technology, why not?  But in the slow-moving world of value investing, who knows?  And thats the difficulty – working out if Apple will dominate in ten years time and betting that there aren’t two young guys in a garage somewhere cooking up the next apple, dell, windows or microsoft office.

Apple’s resurrection started with the return of its founder and prodigal son, Steve Jobs. Whilst off in the ‘wilderness’, Jobs kept himself busy acquiring a little animation studio called Pixar for $10 million, building it up and selling it to Disney for more than $7 billion. He also developed and subsequently sold to Apple his NeXt operating system – for $427 million.

Apple has a market capitalisation of $228 billion. It’s the second largest company in the US – currently bigger than its nemisis Microsoft and about $60 billion behind Exxon Mobil.

Yet as we know from Australia, market cap means little. It is Return on Equity, margins and revenue that reveal the quality and performance of a business. And in these areas Apple and Microsoft are similar.

It is however Apple’s revenue-per-employee number that truly causes the jaw to drop.  Microsoft’s revenue divided by its employees equals US$630,000. Apple’s is an astounding US$1.5 million.

Despite the company’s success, things haven’t always been rosy at Apple. In the 1980’s Apple lost the personal computer war to the PC and Windows became the standard.  This was in part due to the fact that the Windows platform had attracted the ‘killer app’ – Office. But dud Windows revisions and costly software upgrades left unhappy consumers to explore alternatives.

Re-enter Steve Jobs, as interim CEO of the company he co-founded twenty years earlier. Apple’s staff called him the ‘iCEO’… seriously. It was July 1997 and Apple had lost $1.8 billion in the previous 18 months.

Jobs set about replacing Apple’s board, dropped a case against Microsoft in return for Microsoft developing Office for the Mac, edified the grandeur around the brand, killed off the white labeled versions of its products that were cannibalising the company and most importantly simplified the product pipeline, killing every product except four top-end machines. This last move got the [remaining] staff more focused and inventory fell from $400 million to $100 million in one year.

The category killing machine for Apple in the late 1990’s was the iMac –  in fruity colours.  Remember those? And Jobs was serious about simplification. These iMacs did not even have a floppy drive. The user downloaded software from the internet and they were the first computer with a USB port. iMacs were thought of as being ahead of their time.

And being ahead of their time meant Apple could charge premium prices and generate better margins. The additional cash funded research that ultimately launched the iPod. Coinciding as it did with the emergence of the “digital life”, the iPod re-launched Apple.


Fast forward to 2010 – what is the intrinsic value of Apple? And is that value rising? Can Apple live up to the iPad’s promise that ‘…this is just the beginning’.

Apple’s Return on Equity from 2001 to 2005 looks like this: 22%, 24.4%, 27.2%. 29.6%. 28.4%. 29.3% and 27.1% forecast for 2011. I have access to a range of forecasts. While some analysts have projected iPad sales will continue for a year at the current rate of growth, others suggest that once the Mac aficionados have purchased, sales will slow significantly. Revenue estimates for 2011 range from $18 billion to more than $45 billion.  The 2011 estimated decline in ROE needs to be seen in that context.

As you may know I rate companies on a quality scale from A1 to C5, using metrics designed for bank credit departments. Apple is an A1, and that A1 has been consistent for several years. Microsoft, by comparison, is an A2, but its performance has recently been declining.

Why is Apple an A1? It has no debt and even though equity has grown (from retained earnings not capital raisings) from $3.5 billion to over $10 billion, returns have been maintained. This is exceptional.

Buffett says that he likes big equity and big returns on equity and on that score Apple makes the grade.  But Buffett avoids fast-changing sectors like technology because he cannot say with confidence where the company will be in terms of competitive positioning in, for example, a decade’s time.  And who knows that there isn’t a couple of university dropouts in a garage somewhere building the next apple, dell, office suite or google!

So with the share price at US$258, does a discount to intrinsic value exist? Moreover, is intrinsic value rising?

On the first score the answer is yes slightly. Apple’s intrinsic value is US$262.56.  On the second score intrinsic value is rising to a 2011 estimate of $305.03 – a 16 per cent increase.

For the last five years, intrinsic value has indeed increased substantially. Below is a little table to show you Apple’s share price and intrinsic values since 2005.

*Estimate. Not a recommendation. Seek and take personal professional advice.

Only a very small margin of safety exists today and while you may be optimistic about the fact that Apple’s intrinsic value is rising at a satisfactory rate, you do need to remember that the business is in a fast-changing industry. Future performance and intrinsic value will depend on whether Apple continues to strengthen its competitive advantages.  Thank you to the many investors who emailed me and asked for a quick look at Apple.

Posted by Roger Montgomery, 12 July 2010


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE


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  1. Roger thanks for the encouraging words.
    I take it that you have doubts about Microsoft going forward, and I also note that you used a mac in some of your presentation videos. I can understand your scepticism if you are a Mac user! But do we really have to have a ten year time frame to make money on MSFT? I feel that the windows 7 upgrade cycle is just starting, and being the best win version yet, they should get at least a few years of stellar results. You are right though, if I were microsoft, I think I would be wary of challengers such as Apple and Android. With the tablet market cannibalising new PC/laptop sales, more and more people may eventually see the apple os as a worthy competitor (IMO not so atm because of the restrictions in ipad 1)
    However as ipads start to morph from luxury plaything to business tool, , I feel that the restrictions and incompatibilities with the still dominant windows based workplace systems may start to surface. Either apple responds by somehow getting a major slice of the workspace( ex design industries) or microsoft comes to market with a sexy ipad device with win7 compatibility. I see the later happening much more easily . If microsoft can execute well.
    Either way I think we are a few years away from knowing which way the trend will go.
    Perhaps the best strategy is to buy both aapl and msft, it seems to me one will win out eventually, and given the discount available atm to IV both are unlikely to fall too far.

    • Hi Peter/Roger,

      Just wondering if either of you have had a look at Research in Motion. Definitely not one in the bright outlook department at the moment, but seems to have a good margin of safety in terms of the current IV. Current ROE is 41% and Eq/Sh is $17. They don’t pay a dividend so IV is $67. Currently trading at around $23. If they have trouble growing the business then they will have to pay out a divi. Even allowing for POR 60% the IV would be about $48 on my numbers (RR 14%). Is the risk / potential reward there?

      Of course, the real crunch test is in the future prospects, but I was wondering if there is an investment case for a company with good returns in a rapidly growing market and if they can not lose too much market share and maybe even sneak something back with some new models then this could pay off. What happened to their business communication moat? Still there? Is this a don’t touch with a barge pole due to business risk and hot competition from Apple, Nokia, Samsung, HTC…..Looking at the profit and unit sales, still growing rapidly….for now…..Would appreciate any thoughts.


  2. Roger, my first post here after reading your book. Firstly thanks for giving us all a great starting point in valuation techniques.
    I recently decided to analyse apples latest results and in so doing also Microsoft.
    It looks to me that for 2010 year apples ROE was 29.3% ,eq/share of $52.17 and I used a multiplyer of 7.2 to get a IV of $375 very close to current valuation.
    HOWEVER Q1 for 2011 gives an implied 43% ROE and eq/share has risen to $59.35. Using a multiplyer of 13 gives a valuation of $771 per share. So there seems to be a lot of short term upside for apple. There is the risk that the iphone and ipad will be caught by the others, however I see that the penetration of smart phones is not that great (nokia is still the biggest selling phone) and that the tablets are really starting to become more of an essential than an option. That said I have confidence that the sectors that the iphone and ipad are in are expanding rapidly and will for some time to come. .

    Then there is Microsoft. In its latest 2010 annual results I get a 40% ROE and equity:share of $5.32, using a multiplier of 12 and 4 and payout ration of 25% I get a I-valuation of $53.2 versus current $27.06.
    But it doesnt stop there for q1 qnd q2 of 2011 they had an implied ROE of 51.3% and eq per share of $5.48 gving an IV of $84.85

    To my mind this makes Microsoft the better buy as it seems to be less at risk from competitors with its market share. Unless we all stop usin PC’s! In our household we have 4 kids at school and university and a total of 8 computer (laptops) most running on xp and vista. I am now upgrading to win 7 because the dog that was called vista now has a clear upgrade. Thats why I feel the Microsoft has a bright future for the next few years. It may not have the spectacular growth of Apple but it does come at a compelling valuation now.
    Added to the attractiveness of the investment is the fact that if you invest in the US in USD at current rates , you could see a nice Fx gain over the next few years as the USD recovers

    • Hi Peter, What a fantastic first post. You are welcome to post anytime! You may indeed be right. The issue is how much certainty would you put on the world using windows as its interface in a decade’s time? The risk is the fast changing technology. It is very difficult to know who will win the race or even if there won’t be a third or fourth player that steals the limelight and currently resides in the mind of a junior genius in a garage in China or India. I should add this is an older post so you might not have so many viewers here.

  3. Hi Roger,

    I recently setup an brokerage account to purchase some Berkshire Hathaway shares (in the hope that one day i make it to the general meeting) and I’ve noticed that BHP trades on a significant discount in the UK (around 25%). Why is this? If i were to purchase BHP shares in the UK how would it effect the dividend payments if i am based in Australia? Is the discount explained by the currency risk alone?


  4. Hi Roger and fellow investors

    I am bullish on the yellow metal long-term (Soros recently commented that it is one of the true asset bubbles in the world today). I have been doing research on junior miners on the asx. Bass Metals (BSM) seems to be trading at significant discount with quite good fundamentals..Roger I was wonder if you could apply our valuation method to this company? any comments from fellow investors would very much appreciated.

    Roger, I am looking forward to reading your book.

    Happy Investing..


  5. This blog is the best . So are your articles in eureka report .
    Looking forward to your book


  6. My apologies.. My particular phone is a bit slow with the new Os.. Continued. Purchasing companies every few months. Are they paying the right prices or are do they make “synergies” work better than the average company?

    • The measure of whether they are paying the right price robert is the return on incremental capital. That is something that I can look at for you as its the leading indicator if you will.

      • Thanks for the reply,

        That would be fantastic! I guess what I was trying to say is that purchasing companies, like mapping companies or music streaming companies or microchip manufacturing companies, are PART of what gives them an advantage. If Apple doesn’t acquire these companies, someone else will, meaning that these companies are by no means distressed sales – and may well be overpaid for – and in some cases, a must have, no matter the price.

        I would have thought that being an A1 company, in ordinary circumstances, would mean paying less for an asset than it is worth is the only way of going about acquisitions – like any good value investor should. And if it is the case that they are overpaying, then ordinarily it would be detrimental to ROE.

        And also, if they are overpaying, then Buffett’s analogy of acquisitions with the story of the frog kissing princess doesn’t apply – because they are clearly doing very well.

        I would never buy Apple for the usual reason associated with a tech company, but I think it maybe useful to study – as we don’t have anything like it in Australia.

        What do you think, am I missing something here?

      • Hi Robert,

        We will have to examine what contingencies are made at the time of acquisition. Still, the cumulative effect of even a bunch of small overpriced acquisitions will eventually show up in the numbers that I look at.

  7. Hi Roger,

    Great post as usual.. I’m a huge fan of all that All that Apple has to offer. As I’m typing this on my iPhone I’ll keep it short. Do you have any insights into the acquisitions Apple makes? I note with interest that they have just purchase a mapping company. It seem they are purcha

  8. Michael Vanarey


    I found an error in paragraph 15 of your blog.
    The quote: “Apple’s Return on Equity from 2005 to 2001 looks like this: 22%, 24.4%, 27.2%. 29.6%. 28.4%. 29.3% and 27.1% forecast for 2011.”

    I think you meant to say ‘2010’ instead of ‘2001’.

    It should read: “Apple’s Return on Equity from 2005 to 2010 looks like this: 22%. 24.4%. 27.2%. 29.6%. 28.4%. 29.3% and 27.1% forecast for 2011.

    Michael Vanarey

  9. Roger,

    How do you manage exchange rate volatility in your international equity investment portfolio and do you attempt to account for it in your Intrinsic Value (IV) calculation and the associated requisite margin of safety?

    Using the example of Apple and the US dollar prices you posted above:

    If you had bought an Apple share in late November 2008 the AUD purchase price would have been A$266 (AUD/USD = $0.6175). If you sold them yesterday the AUD realized price was A$288 a gain of 8.3% (AUD/USD=$0.8825), which is a long way from the USD denominated gain of 54.8%. The difference in USD share price performance was destroyed in the AUD conversion due to strengthening Australian Dollar.

    Swings in the AUD/USD rate of 40% to 50% over a two year period are not infrequent. Plus/minus 5% volatility in a week is relatively common. I note that this volatility can swing both ways, but for most of the last seven years the long run trend has worked against the Australian based international investor. In my personal experience it has destroyed much of the gain from astute international stock picking.

    The argument that long run the exchange rate volatility is a zero sum game just doesn’t cut it. Yet the options to hedge against the exchange rate volatility are limited and expensive for the average Joe like me. Do you have thoughts on this subject that you can share?

    I also note that managed international investment funds (either unhedged, or partially hedged) really flog their wares and performance in times of weakening AUD (look back to the mid-late nineties when we were all pushed toward international equities as an investment asset class by the financial gurus of the day), implying the boosted returns are the result of investment prowess, yet when the opposite occurs it is all the result of factors outside of the investment managers’ control. The message from this: those who choose the managed investment fund route to exposure to international equities need to carefully consider where those AUD denominated returns are coming from.

    Yet, if you believe (like me) that the upward commodity price march must falter, then now is the time to consider the possibility of greater unhedged exposure to international equities in expectation of the associated unwinding of the AUD strength of the last few years. It may be a bit macro for your approach, but any thoughts would be welcome.


    • Hi Lloyd,

      The reason why the zero-sum-game argument has cut it, is because the $US has been on a hiding to nothing for as long as the idea that the twenty first century will belong to the Chinese empire (much as the twentieth belonged to the US and the nineteenth to the British Empire) has been gaining traction.

      Bottom line your questions whether wittingly or otherwise seeks a currency forecast. I wish I was smart enough to know the direction of currencies. Arguably, the forces behind the US-dollar-to-weaken argument are worse for Australia but ours is a commodity currency as you have observed. For as long as there is optimism about China and our ability to supply commodities as well as our desirability as a supplier, I suspect the $A will remain relatively supported. If that sentiment changes so will enthusiasm for our currency.

      Even someone who stays at home in Oz and never travels, indeed even if they never leave their suburb, they cannot ignore the impact of currency movements. It will eventually impact them, through changes to the makeup of businesses they source their products and services from and/or the prices that pay for those products and/or the price they pay to fund those purchases. So the argument goes that diversification outside of $A is sensible. But just as broad divdersification produces mediocre results in equity investing so will a shot gun approach to currency diversification.

      You have to take a view. That view I believe is that the Asian currencies, those nations regarded as creditors, will strengthen over time and the debtor nations will weaken. I don’t know when nor do I know by what magnitude, but basic economics explains that. The best currency traders in the world, the likes of Soros and Jim Rogers hold this view and no doubt their currency brokers too (are you there Ivan?) Jim Rogers sold his house in New York and moved to Singapore for this reason – don’t have your assets in US dollars. Warren Buffett has also been investing outside the US with much more urgency than has been seen previously. Once again only time will tell but you could do worse than following the path of the very rich and very successful investors I have named here.

      • Roger,

        With due respect, I think you are glossing over the single biggest factor that has to be accounted for in any international equity investment strategy, valuation and determination of margin of safety. Perhaps it deserves a separate thread of its own. I am sure that it would engender great discussion and insight.

        Few Australian international fund managers have done well in international equities independently of currency movements. I think the opposite has happened, despite the value based investment approach of some for whom I have considerable respect. Exchange rate volatility has played a large part in the problem.

        One international fund floated in 2006 at $1.00/share plus an associated option on shares in the manager. If I recall correctly the NTA backing at the time was A$0.985/share (after expenses etc) and the AUD/USD traded at 0.76.
        Fast forward to the present and the NTA is currently A$0.766/share (net of deferred tax assets), a 22% loss over 3.5 years, while in the same period the the AUD/USD strengthened 14% to 0.87. The shares currently trade at $0.63/share. From early 2007 the shares have typically traded at a 10-15% discount to the NTA compounding the problem (as it does for many listed investment companies) and the loss for the initial investors in the fund (exercising options did little to offset this decline).

        Based on these numbers the the AUD/USD has been a major (but not sole) factor in the mark to market losses an investor would have incurred in the fund.

        This performance is despite some very astute stock picking and individual gains in USD. However, some major unforced errors were made. An example, the investment and subsequent doubling up in Sally Mae proves even the best are subject to “errors of commission” in Buffett’s terms. However, overall the performance of the portfolio in foreign exchange terms has beaten the benchmark (caution to readers: this is a relative, not an absolute return measure and in this case means the fund lost less than the benchmark and most competing funds). Benchmark relative performance aside, it still lost money to the extent that the AUD/USD volatility has contributed to 30%-60% of the loss depending on your base for the calculation (share price or NTA).

        So exchange rate matters and the performance of even the best international funds have been hammered by it. The corollary of this is that you have to have a strongly held and well formulated view on exchange rates before entering the international investment pool or you’ll be eaten by the many currency sharks. Some international managers posit that in the long run the “weighing machine” of the market will cut-in and the value of the portfolio will be recognized in share market pricing. This may be so in USD, but in AUD?

        Personally, I think that the international “weighing machine” argument is problematic in the context of the plus/minus 50% exchange rate volatility of the AUD and the arguments you posit for continued secular weakening of the USD. Exchange rates, like share prices move violently around “intrinsic value” and we need both to be on the opposite sides of intrinsic value (i.e. at the time of an international share sale an undervalued AUD and overvalued USD share price, with the opposite applying at the time of share purchase) for the weighing machine argument to work for the international equity investor basing his return on Australian dollar measures.

        Remember, Benjamin Graham never invested outside the good old USA and his “weighing machine” argument is only guaranteed to apply within a single (currency) market. Cross currencies and another overlay comes to bear, one with arguably greater volatility than that found in the equity market, and one which will more often than not work in the opposite direction to the equity market “weighing machine”.


      • Thanks again Lloyd,

        The time you take to pen your thoughts is greatly appreciated. Like I said, you are asking me ultimately for a currency forecast. With regard to the importance of margin of safety and valuation; they are the primary reason for this blog’s existence (and hopefully Carly Simon’s ode to James Bond applies).

  10. Hi Roger

    Just on the fast changing tech sector I think there are plenty of good reasons why apple can stay ahead of the pack. They have the smartest guys in the room, a war chest of money to buy anyone else up and coming, largest supplier of content with itunes and the app store. But overall I think their biggest asset is the ability to combine great software with quality hardware. Most other companies tend to concentrate on hardware (nokia/dell) or software (google/microsoft) but its the marrying of the two which makes apple so successful.

    • Thats a great observation James. Thank you for sharing it. I think you are right. Interesting how quickly sentiment shifts though because of one antenna in the iphone 4 don’t you think? Much more challenging to invest in fast changing industries etc etc…

      • The antennae controversy will blow over as the history of rivals as Nokia, Ericsson, etc have shown. People don’t stop buying a brand just because the latest model is defective. Customers stop buying into the brand when it no longer *offers* what the customer seeks. Sounds paradoxical but we only have to look at Microsoft & Toyota for examples of customers that keep buying the latest iterations despite severely negative publicity over product defects.

        I want to buy into Apple shares, a shame that the costs of doing so with my available funds currently make this unfeasible. For the record, I do not own a single Apple product but my family does.

      • Thanks John,

        I was hoping someone would be willing to discuss the antennae issue. You bring excellent perspective to the issue. People have been buying Windows for decades despite the constant rebooting, crashes and faults.

  11. Nice write up Roger. Anecdotally, I am an Apple hater and yet even I am strongly considering getting an iphone. I feel like a total traitor, but their competitors are failing to step-up. As soon as someone else delivers an equivalent smartphone at the same price, I will swap, but who knows maybe I’ll be converted to Apple’s evil closed ways by then. I’ve heard excellent things about the HTC Desire, but neither $79/mth nor a Telstra mobile contract are attractive to me.

    By the way you might want to double check your 2011 revenue numbers for Apple. The average estimates I see are $61B for this year and $76B for next year. They did $15.7B and $13.B in the last two quarters.

    One day Apple will make a good short, maybe in a year or two.

    • Hi Dean

      There are some real bears out there and quite a few sell recommendations so the $15-$45 range may need to keep the lower boundary. Lets take it as read now that the upper boundary is $76bln. In which case it could be a bargain. Again seek advice before doing anything, especially when based on forecasts that may fail to materialise.

      • Thanks for the reply, it’s wonderful how you take the time to reply to each comment.
        In this case I again encourage you to re-check your facts.

        Check Bloomberg or whatever service you like and you’ll see analysts estimates for Apple’s 2011 revenue of between $67B and $88B. $76B is consensus and while I grant analysts are on average optimistic, there is no-one anywhere near $45B, let alone $15B. That drunk guy at the pub does not count ;-)

        If AAPL wanted to increase their ROE all they’d have to do is make a special dividend payment of the $23B they have in cash and short term securities. ROE would leap up. ROE is just one ratio, one piece of the puzzle. The 2011 estimated decline in ROE is easily explained by the screeds of cash AAPL will be adding to the BS, thus increases equity, in that time frame.

        I note the HTC Desire is now down to $49/mth caps.

      • Hi Dean,

        Very happy to recheck those estimates and be corrected Dean. Thanks for being so persistent. I will catch up with the bloke who gave those estimates to me this week but this time I will chat with him on the street before he goes into the Welcome Hotel. Perhaps he was indeed mumbling about his ticket for the meat tray raffle that night.

  12. Just on the fast changing industry note – the share price of Research in Motion, the company which makes the Blackberry which is a big loser to Apples i-phone, is in a serious downtrend since the i-phone was released.

  13. Hi Roger. Thanks for this interesting article. I was only recently thinking of trying to value Apple after reading your book. I have also been wondering if your methodology could be applied to international shares. I expect your valuation isn’t considering exchange rate issues of buying US companies with Australian dollars. The Australian market is so small on a global scale and dominated by big miners and banks. I’ve been thinking the value investor might have more luck also looking internationally.

    As somebody who’s been in the tech industry for many years, I’m very impressed with Apple’s products. The future of computing clearly seems to be moving towards highly functional, mobile Internet enabled devices such as the IPhone and IPad. Apple seems to have the jump on their competitors in this area, particularly Microsoft. I can see Apple being very strong in the near future. There will be other players very keen to get a piece of the action, eg Google. The future of Microsoft will be an interesting one. If PCs decline in necessity, their revenue might steadily shrink to mainly enterprise server and office applications. I expect Microsoft may turn into another Telstra, with limited or declining earnings growth.

    • Hi Steve,

      Thats a very insightful couple of sentences at the end there Steve. Well done and thanks. The valuation method can be applied easily to any stock anywhere in the world from New York to Nigeria.

  14. william gill

    Hi All
    Good to see a US stock being written up, when ever I am in a foreign country, I look for new trends, businesses that appear to be performing exceptionally well etc.
    Apple is a good company and I have been enjoying their products for over twenty years. Alas as with any business I look at overseas, I would be factoring in a larger required return, so opportunities are slim.
    Some time back Lloyd mentioned Li Ning, a Chinese sports company listed on the Hong Kong exchange. They do carry a bit of debt, but with over 8000 stores, and projected roll out of 700 stores a year for the next 3 years. The mind boggles They have recently opened their first store in the USA.
    Nike will have to put their running shoes on.
    In the Philippines Jolly Bee a fast food company has intrigued me since the early nineties. continually rolling McDonalds at what they do best. Expansions have been in Dubai, USA, China and most countries that have Filipino overseas foreign workers.
    Companies such as these pop up all the time, but for the rewards you have to get in early,
    Maybe fellow readers have examples that they can share.

      • Lloyd Taylor


        I’d be interested to receive your valuation and views of ExxonMobil (XOM). On a macro view there is a reasonable chance that we might see some near term softening of oil demand growth, which could parlay into market perceptions (and pricing) of oil stocks. This might provide an entry point for the next uptick in the oil price cycle and having a view of the IV of XOM would be most useful in such a circumstance.

        And heck while your at it, why not one closer to home, Woodside Petroleum (WPL), although its basically a gas rather than oil business, albeit with longer term linkage of much of its gas revenue to long run average oil price. I suspect that your IV will be well below the current price, but things might get a little shaky in the near term and its useful to be prepared.

        Thanks in advance.


      • Roger,

        The long run reserve replacement ratio, together with the finding and development cost per barrel are the key ratios that I look at when considering oil company economic efficiency and economic value.

        On these measures Shell is lowly ranked amongst the majors. Certainly it is the amongst least desirable investment opportunity of the remaining “Seven Sisters” based on these measures. The problems come down to the inevitable consequence of a poor management culture (which developed over the last fifteen to twenty years) encountering a great business; something to which I referred in a previous post. That said, it probably has been overtaken as a “poisoned chalice” by BP given the mismanagement of the Macondo drilling and subsequent spill.

        As an interesting aside, the naming of BP’s disastrous well blow-out has an eery foreboding in the narrative of García Márquez’s “One Hundred Years of Solitude”, in which the town of Macondo grows from a tiny settlement with almost no contact with the outside world, to eventually become a large and thriving place. The establishment of a banana plantation leads to Macondo’s downfall, followed by a gigantic windstorm that wipes it from the map. As the town grows and falls, different generations of the Buendía family play important roles, contributing to its development. The start of the fall of Macondo comes first as a result of a catastrophic four-years of rainfall, which destroys most of the town’s supplies and image. During the years following the rainfall, the town begins to empty, as does the Buendía home. The final stroke is, in fact, presaged in the manuscripts written 100 years before.

        I wonder if the geologist who named the Macondo prospect had any sense of what was to come?

        And who says the world of oil and finance is boring?


        P.S. A disclaimer – I spent many good and enjoyable years of my career, on two separate occassions, with Shell. Although I think it is was great business, I beleive that sadly it has lost its way and the road to redemption does not appear to be the path it is on.

  15. The idea of leveraging off a profitable product into new but related market segment is not unique to Apple’s iMac to iPod strategy.

    Intel, the dominant manufacturer of Central Processing Units (CPU), the brains of the majority of personal computers.sold to date is profiting handsomely from its joint venture with Micron to create the new computer storage equipment market for Solid State Drives (SSD).

    Note, this is NOT a recommendation to rush out and buy Intel, but my observation of how successful companies build on their strengths to pioneer new markets and new sources of profitability.

    Tuesday’s announcement by Intel of its largest quarterly net income in a decade underscores how successful companies utilise their core expertise to open up new markets for the benefit of its customers and share holders.

  16. roger cladingboel


    thanks for the analysis,

    I guess this shows you a few things,

    Tech companies that get it right can do really well.

    If you had decided not to buy Apple in 2005 because its intrinsic value was running 21% lower than share price you would have missed out on a capital gain of 590% or 47% growth YOY.

    47% growth YOY is superb, where do i sign up…

    this is why people like the bluechips

  17. thx for that Roger fantastic read as always !!!!
    very interesting with the intrinsic values of apple going back in time
    i wish i would of bought apple in 2004 i was thinking about it .
    i saw an massive increase in mac laptops being used and couple years later i thought i had missed the train .
    But it would still of been good buying opportunity .
    hindsight is however easy to have .
    But like you said it is a very fast moving industry
    I remember when nokia dominated mobil telephones and apple has taken large market share from nokia and they are competing with many different it tech and information companies .
    i also remember when yahoo was the leader until google came along .

    Thx Cody

  18. Very interesting read Roger. Thanks.

    The “Apple” story is a fascinating one isn’t it. I suppose the big question is can the success continue, especially when Jobs retires.

    Interesting one to watch in the future.

    Looking forward to reading your book soon.

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