Apple’s Cash Update

Jul 31, ’10 2:11 PM

During the last quarter, the company added $4.1 billion in cash to reach a total of $45.839 billion or $49.43 per fully diluted share. This is divided into three types of holdings (long- and short-term marketable securities and cash equivalents).

Some (most?) financial reporting services do not include long-term marketable securities in their databases. This is a tragic error which mis-states most of the balance sheet ratios that investors may depend on. Offending sources include Capital IQ (which feeds finance.yahoo.com.)

To illustrate, the following chart shows the total cash equivalents for the company. The orange colored bars represent long-term securities. If they are excluded, an investor may conclude that Apple’s cash has been *declining* since 2008 when the opposite is true. The company is shifting an increasingly larger proportion of its holdings to long-term (but fully liquid) securities.

The company devotes 9 pages in its 10-Q to describe and value the cash positions it holds. It’s a pity that most aggregators of the company data don’t bother to note $21 billion in assets.

bob

Interesting, I didn't realize that the definition of long-term was simply any investment that has a maturity date of more than 12 months from now.
Stu

Any ideas as to why the change from short to longer term securities?
- http://www.asymco.com asymco
  
  Better returns, perhaps. The instruments are the same:
  
  Short-term marketable securities include:
  
  U.S. Treasury securities
  
  U.S. agency securities
  
  Non-U.S. government securities
  
  Certificates of deposit and time deposits
  
  Commercial paper
  
  Corporate securities
  
  Municipal securities
  
  Long-terms marketable securities include:
  
  U.S. Treasury securities
  
  U.S. agency securities
  
  Non-U.S. government securities
  
  Certificates of deposit and time deposits
  
  Corporate securities
  
  Municipal securities
  
  The only security missing from long-term list is Commercial paper.
Sam

Thanks. I notice you don't usually include the cash balance on your estimates of the price of aapl. Why not?
http://www.asymco.com asymco

I do track the cash as part of the price and the P/E ratio. I don't always publish the P/E ex-cash because it's unconventional. The challenge with excluding cash is that the formula should be EV/FCF (enterprise value over free cash flow). These values are difficult to get for many companies and impossible for indexes (e.g. S&P 500) making comparisons difficult.

However I just posted the latest P/E ex-cash here:
http://www.asymco.com/2010/08/02/apples-pe-ex-cas…
- JonathanU
  
  Agreed – P/E ex-cash is an imprecise valuation metric due to the earnings still including the interest accrued in the OI&E line in the P&L. However, so long as you subtract this from Net Income and use that to calculate P/E you are good to go. As long as you are comparing Apple to Apples, you can slice and dice it anyway you want really.
  
  However, given Apple makes about 0.76% interest on their cash, the OI&E is pretty immaterial so it's probably not worth being too rigorous and going back over your data to make it completely 100% accurate!
http://twitter.com/sfsam sfsam

It's not an error for reporting services to not include long-term securities in cash. Cap IQ, Yahoo Finance, etc are doing it right.

Long-term securities are not cash and should not be confused with cash. Some LT securities (like US Treasuries) are quite liquid. Others (like CD's or time deposits) are illiquid. You have to actually know what securities a firm holds because it varies from firm to firm. If you are relying on a simple cash/mktcap ratio to capture LT securities, it is *you* who are doing it wrong, not the reporting service.

Furthermore, this post implies that most investors are undervaluing Apple's balance sheet and that is simply false. No major analyst has overlooked long-term securities for Apple or any other company. This is kindergarten stuff.

It is up to the investor to understand the composition of a company's balance sheet and not blindly rely on ratios which almost *always* hide important detail. This is true for every company, not just Apple. To understand a company, you need to actually read the balance sheet and know what the line items mean. If you can't do this, you won't really know what you are buying.

It's also worth noting that huge cash balances are the norm today. This is not an Apple-specific phenomenon. Tech companies in particular have massive cash balances which they are unable to invest at good rates of return. Hoarding cash like this and generating poor returns is not a benefit to shareholders. You don't want your company piling up cash to the sky which they are unable to invest at good rates of return. It would be better if companies returned more of that cash to owners as dividends since it can't possibly all be reinvested in the business.
- Joseph
  
  The post explicitly said that Apple's long term investments are "fully liquid", which is backed up by the fact that most analyst's include Apple's long terms in cash. What's the norm and what's correct aren't always the same thing. Cap IQ, Yahoo Finance are not doing it "right". They're just doing what's normally done, and what's normally done is lazy and, as this post points out, misleading.
- John
  
  I own a fair amount of apple stock and I definitely do NOT think that apple should give cash back to shareholders. I don't have any better ideas for how to invest that money than apple does. I would much rather they hold on to it and look for good opportunities to invest it — I'm quite sure that they will find better opportunities than I can. Yes, it is frustrating that haven't found those opportunities yet, but we are in a quasi-depression, so I'm willing to cut them some slack.
  - JonathanU
    
    John,
    
    I've got a much better idea of what to invest my cash (which is currently sitting on AAPL's balance sheet) in. More AAPL shares.
    
    Buy backs are the only way forward. Dividends suck for tax reasons and there is absolutely no way they can invest $45bn in positive net present value projects.
- http://www.asymco.com asymco
  
  Strictly speaking "Cash" should be just "cash" which is the blue part of the chart. However, the intention is to report liquid assets. The CFO reports "Cash plus short-term and long-term marketable securities" every quarter as part of the discussion on cash (http://seekingalpha.com/transcripts/for/AAPL). As I've pointed out before, the company invests long- and short- term with the same instruments (with different maturities). There is no question of their liquidity.
  
  But all this is being pedantic. The average investor and the average reporter frequently cites cash as an underlying base value for the company. For example citing that the company is worth X times cash or that the P/E should be exclusive of cash. I've read many stories where the "cash" being cited is "cash and short-term investments" but what is meant is "cash and short- and long-term investments" and certainly not just "cash". If you're going to refer to "cash" then either cite it correctly or pick a consistent measure of liquid assets. The point here is that the long-term assets are now $21 billion! That's hugely material and if you're going to imply something from multiples of liquid assets, you can't ignore the bulk of those assets.
  
  And I know that huge cash is the norm today, that does not affect this argument. Nor am I passing judgement on Apple's use of these assets now (although I've made suggestions here: http://www.asymco.com/2010/06/29/apples-supply-pr…. Also, your opinion on dividends has to address double taxation.
  
  For better or worse, investors should be made aware that 20% of their Apple investment is sitting in a bank and not being risked (or rewarded).
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