The Upside of Apple

This article was written with Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

In the process of taking most of its competitors’ profits away from them, Apple built a trove of corporate cash the likes of which the world has never seen before.

In my opinion, the efficient market theory is not very, well, efficient. How else could one explain the recent proposed purchase of H.J. Heinz (NYSE:HNZ) by Berkshire Hathaway (NYSE:BRK.A) at a 20% premium? All that excess value could have sat for years among investors, were it not for a single investor who saw it and snatched it up. And let’s not forget that Berkshire is not known for overpaying. That crafty Buffett thinks there’s still more upside or he wouldn’t have done the deal.

This gets me to – as so many stories in finance and investment do these days – Apple (NASDAQ:AAPL). I don’t think there’s anyone big enough to take out Apple… but if there was, they should do it, if only to silence the bears.

There’s a number of ways I reach my conclusions, but one of them has to do with the overall share of industry profits captured by Apple. According to my good friends at institutional brokerage firm Canaccord Genuity, for the quarter ended December 31, 2012, Apple captured a remarkable 69% of the smartphone industry profits. Together with Samsung’s (PINK:SSNLF) 34%, the two companies had 103% of the industry profits. Not only did Apple and Samsung grab all the profits, but they generated losses among their competitors.

In my mind, this all but dooms Nokia (NYSE:NOK), and by default, it pushes Microsoft (NASDAQ:MSFT) out of the mobile phone business. The way I see it, there simply won’t be room for a third mobile ecosystem, and Windows Phone software now running across Nokia devices will ultimately be consigned to the dustbin of history. We will soon be living in a Android (NASDAQ:GOOG) and iOS world.

In the process of taking all of its competitors’ profits away from them (save Samsung), Apple built a trove of corporate cash the likes of which the world has never seen before. At last count, it was about $137 billion, or about $145 per share. It’s almost like the folks in Cupertino should fold up shop and say, “We won.”

Regardless, if you strip away the cash from the current share price of $446 per share – sorry, as a fund manager, I just can’t help myself – that means the Apple franchise is valued at about $301 per share or 6.6x the September 2013 consensus forecast and 5.7x the September 2014 consensus forecast.

Throw in a 2.3% dividend, and any way you slice this number, it’s cheap. That’s why, regardless of what the bears, the technorati, the naysayers, or the impatient hedge fund managers are saying, I’m buying more AAPL for the GMG Defensive Beta Fund (MUTF:MPDAX).

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