24/7 Wall St. 2007 Break Up Values: Apple $84 (Current Price $86)

By Ryan Barnes. Edited by Douglas A. McIntyre

Apple Computer (AAPL; $85.94, breakup value $84)

Apple is another company that would likely never be split up; it receives a premium in the market because of the Apple name, and any division would likely erode some of this premium.  Apple is a company all about culture and brand.  Who else would have the audacity to sell a $500 cell phone right out of the gate?  Only Apple; our breakup value provides a possible floor for the stock and from there you can debate amongst yourselves the relative value of the brand and future prospects for things like the upcoming iPhone.

Computer products and Music Products (iPods) are the two main operating segments, with two smaller segments in Software and Hardware Peripherals.  For the sake of analysis we will include the iTunes software and services with the iPod segment due to the similar revenue growth rates. 

We will consider selling off the 2 small units, which would easily get gobbled up by a competitor in order to capture the AAPL storage products and graphic software.  By assigning a multiple on the low end of industry averages (to reflect the tame single-digit revenue growth at the segment) of 5x sales, the two units would sell for about $10 billion.

The computer segment would have to fetch a lower multiple than software to reflect the industry averages; those who love their Macs really love their Macs, but we should remain as conservative as possible when applying metrics.  That being said, considering that the computer segment is still producing revenue growth of 40%, we can feel safe applying a multiple at the top end of industry averages. We will use 1.5x sales, which brings the value of this segment to just over $12 billion.

Now for the all-important iPods & related software product group.  This segment is still growing revenue at 25% plus as is already the biggest contributor to company earnings.  While specific operating margins are not reported, most of the company multiple is attributed to this product group, so we use the company-wide 3.5x sales figure, bringing the value of the segment to $40 billion.

A balance sheet liquidation would give us another $9b and change, bringing the total breakup value to $84, just below current trading levels.  Considering that we’ve erased all of the brand value from the Apple name, the $84 level is a nice security blanket for owning such a culturally integrated company. 

Ryan Barnes

Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others.  Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.

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