Tuesday, December 18, 2012

Public Company Analysis and Valuation Model - Apple Inc.

Before I buy a company’s stock I like to make my own estimate of its long-term financial prospects and value. 

As part of my analysis I use a company’s historical financial statements (available on the web for free at sec.gov, Google Finance, Yahoo Finance and MSN Money) as a base to forecast earnings potential, cash flow and balance sheet position.

With the exception of sec.gov (which provides for download of historical data into a spreadsheet - no formulas - for selected public companies) the above sites do not provide a means to forecast future operations.  Because of this void, I developed a web-native public company analysis model for use in forecasting both future operations and estimating a company’s intrinsic (fundamental) value.

Let’s consider a financial forecast and intrinsic value analysis of Apple Inc. (AAPL) using our software.  Click here to access the forecast and valuation model.  Please feel free to change the forecast and valuation assumptions to create your personal Apple analysis - just remember to save your changes by clicking the Save button on the relevant pages.

(If you would like to save your work for future use, please sign up for our free public company analysis model membership before you begin your Apple analysis.  Aside from quantifying an individual company’s financial prospects, using the public company model is a great way to practice / learn financial forecasting and business valuation concepts that are applicable to both public and private businesses).

Financial Forecast

Apple’s historical income statements and balance sheets, plus a few assumptions, create the first draft of a five-year financial forecast. The first draft is principally a momentum forecast - a forecast based on my initial sales forecast and Apple’s historical income statement and balance sheet metrics. (This draft is provided “as is” and solely for demonstration purposes, not for trading purposes or advice).

Change any or all of the first draft assumptions to see how the changes impact future results. The output of the model consists of the primary historical and forecasted financial statements - annual income statements, including earnings per share (EPS); balance sheets; cash flow statements; and documentation detailing the key assumptions underlying the forecast.

Intrinsic Valuation

Once a working forecast for Apple is developed, you can perform an intrinsic valuation of the company by clicking on Step 5 of the forecast menu. The purpose of this module is to estimate the intrinsic or fundamental value of the company’s common stock - that is, the value a share should have, based on your financial forecast and valuation assumptions, not to be confused with its current market or trading value.

The intrinsic valuation component analyzes the value of a company based on the theoretical sale of the company to a buyer (at the beginning of year two of the five-year forecast) who re­capitalizes the company, owns it for four years and then sells it. That buyer realizes the operating results depicted in the financial forecast and receives all of its investment return from the future operations of the company.

The intrinsic value estimate is determined by calculating the pre-tax amount the buyer pays to the current equity owners (shareholders), in aggregate and per share, to buy the company. This type of analysis is particularly relevant to public company merger and acquisition transactions.

In order to generalize the purchase and sale transaction across a potentially infinite range of “deal” attributes, the intrinsic valuation analysis assumes that the buyer purchases the assets of the company and pays off all of its liabilities at the closing. Therefore, the owners (shareholders) of the public company receive a payment equal to the enterprise value of the company, less the amount of liabilities assumed and paid-off by the buyer.

The output of the intrinsic valuation component consists of the Estimated Intrinsic Valuation Summary; primary historical and forecasted financial statements -  annual income statements, balance sheets and cash flow statements -  showing the company’s financial performance before and after the pro forma sale by the owners; and documentation detailing the key assumptions underlying the analysis.


The private company corporate finance models on my website (www.corpfin.net) are just as easy to use as this public company model. Our other models include Start-Up. Established and Early Stage business forecast models; and LBO Valuation, Private Equity Placement and Single-Year models.

In the future I will post analyses of other widely held public companies (e.g. Cisco, Yahoo!, Google, GE, Oracle, etc). If you sign up for our free public company analysis model membership you will be able to save your work on our server, and you will have access to additional public company financial analyses as they are published.

Please let me (tgf@corpfin.net) know your suggestions for other public companies to feature.

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