Thought provocation on Apple….

In the results released on Wednesday after the belll, the most important measure of profitability and flexibility for a company – Free Cash Flow (defined as cash flow minus maintenance capital expenditure), was very healthy to say the least.

Apple in fact grew free cash flow 30% in the quarter to over $21 billion. Over the past twelve months the company has generated a total of $47.4 billion in free cash flow taking its cash pile north of $137 billion. These numbers are simply phenomenal. To put them in perspective, Business Insider noted yesterday that Amazon.com has earned a mere $5 billion in its entire history. Apple generated nearly triple that amount in its last quarter.

To further demonstrate Apple’s amazing profit machine, consider that aside from the company’s cash pile that it has about $32.5 billion at work on its balance sheet that is responsible for generating that $47.4 billion in free cash flow. That’s greater than a 145% return on invested capital. A company generating a 45% return is considered a super star in the corporate world. 145% is absolutely astronomical. Put the cash back in to the equation and the company generates a still meaty 28% return on total assets.

So let’s take a look at what investors are really paying for in Apple’s shares at present levels. The current market capitalization is $422 billion. Back out the cash of $137 billion and you get an enterprise value of $285 billion. That amounts to a mere 6 times the company’s free cash flow over the past twelve months. In other words, investors get a 16.6% free cash flow return on their investment at the current share price. What’s more, Apple, on an enterprise value to EBITDA measure, is now cheaper than Microsoft.

Even when you don’t back out the cash in its bank accounts, the stock currently trades at its cheapest valuation at any time over the past decade. Over that time, Apple’s stock price has typically found a bottom near 10 times gross cash flow. In 2011, it bottomed at 8.5 times cash flow before running 75% higher over the next 12 months. Today, it trades at 7.5 times cash flow. 

Food for thoughts married with very negative sentiment and oversold technicals….