In this post I calculate the intrinsic value of Apple (AAPL) using a Discounted Cash Flow (DCF) model. As of this writing (31. Oct. 2018) AAPL is trading at USD 218.86. I used Jupyter Notebook for my analysis. According to my model, Apple’s intrinsic value per share is USD 229. That is, currently it trades at a 4% discount or margin of safety.

Helper Functions & Imports

Calculating Beta Using Linear Regression

Net Capital Expenditures

Working Capital
Working capital is the capital that companies require to meet their everyday financial obligations and commitments to operate successfully i.e. ability to pay suppliers, salaries payable, maintenance costs, replenish stocks etc. In accounting terms, it’s the difference between current assets (such as inventories, accounts receivables and cash) and current liabilities (such as accounts payable and other short term liabilities).

Working Capital = Current Assets – Current liabilities

Change in Working Capital (ΔWC)
What Causes a Change in Working Capital?

Asset increase = spending cash = reducing cash = negative change in working capital

If an owner of a business makes an investment of \$100k into his company, current assets increases by \$100k without any increase in current liabilities. Therefore, working capital has increased by \$100k. So the change in working capital is negative. Liability increase = owing something = not spending cash upfront = increase in cash = positive change in working capital Accounts payables increases by \$500k, therefore, working capital has decreased by \\$500k. So the change in working capital is positive. We need to find the change in working capital, which is the difference in working capital levels from one year to the next:

ΔWC = Previous Working Capital – New Working Capital

If the change in working capital is negative, that means working capital increased as the company needs more capital to grow. This reduces cash flow and so it should reduce the owner earnings. If changes in working capital is positive, that means working capital decreased as the company has more cash for the company to grow and play with. This increases cash flow and so it should added to owner earnings.

Net Debt Issuance
How much of the company’s reinvestment needs are being financed by equity, and therefore returning cash flows to equity? We can simply multiply our figure for reinvestment needs by (1 – debt ratio) to obtain a figure for the reinvestment needs financed by equity.

The Discount Rate

Free Cash Flow to Equity (FCFE)
FCFE is a metric of how much cash can be distributed to the equity shareholders of the company as dividends or stock buybacks—after all expenses, reinvestments, and debt repayments are taken care of.

FCFE = Net Income – [(1–b)(Capex–D&A)+(1–b)(ΔWC)]

• D&A is the depreciation and amortisiation
• b is the debt ratio
• Capex is the capital expenditure
• ΔWC is the change in working capital

Note: a negative change in working capital is a burn thru of cash, therefore I subtract it. Why? Because the working capital requirements have increased (increased inventory, receivables or reduced payables) and I look at the change as Y1 – Y2, therefore if working capital for Y1 is 50 and for Y2 it’s 70, change in working capital is -20 therefore the company is burning 20 extra cash which flows directly down to FCF.

Compounded Average Growth Rate (CAGR)
I look at 5 years worth of data. It provides enough history to make projections easier and more trustworthy. I calculate free cash owners earnings rates for multiple periods and then calculate the median of all the periods.

• 2013-2017 (4 year period)
• 2014-2017 (3 year period)
• 2014-2016 (2 year period)
• 2013-2016 (3 year period)
• 2013-2015 (2 year period)
• 2014-2015 (1 year period)

Future Cash Flows

Equity Value per Share

Summary