Generals: Apple TWX Analysis

Apple 

Generals: TWX Analysis

May 29, 2016


SUMMARY INFO

  • NASDAQ: AAPL
  • Recent PPS: $100.35
  • Shares Out: 5599.8 million
  • Market Cap: $561,940
  • Net Cash: $20.95 per share

DISCUSSION

Thursday’s FT article that reported an AAPL executive proposed a bid for Time Warner (NYSE: TWX) is precisely the type of game-changing move AAPL needs to make from a long-term ‘moat’ perspective.

Forget the bullish prospect of AAPL becoming the Berkshire Hathaway of content – buying TWX would begin to solve a basic 2-part math problem for current AAPL shareholders: AAPL’s terminal fair value PE is likely limited to 10x in its current earnings power configuration + its net cash position is worth no more than ‘par’, if not at a discount if the market places a discount on overvalued stock buybacks.

PRO FORMA TWX

The ‘Street’ estimates TWX will earn $7.56 billion of EBIT in 2016. Taxed at 25%, that’s $5.67 billion of NOPAT. In a recent Lex article, the FT estimates AAPL would need to pay $110 billion in total EV – $22B of which is debt – to acquire TWX, which is approximately 19.4 times 2016 NOPAT.

Not only is 19.4 times not expensive for a game-changing acquisition; when AAPL can issue 5% 30-year debt to fund the entire purchase and still have almost zero turns of net leverage + convert its net cash position into a durable, high multiple asset…19.4 times could be considered a bargain.

In a recent write-up, I estimated that AAPL’s current ‘normalized’ earnings power (NOPAT) was approximately $44.5 billion, or $7.95 per share. TWX’s $5.67 billion of NOPAT adds $1.01 per share, for PF earnings of $8.96 per share.

AAPL would see a slight valuation degradation on the surface, as the pro forma PE would rise from 9.98 to 11.2 times (assuming net cash goes to $0). But not only does 11.2 times not account for any operational/bargaining power synergies, IMO it undervalues the long-term ‘moat’ prospects of the pro forma entity…

LONG-TERM MOAT

The FT’s recent Lex column believes that distribution agreements are the cheaper, more financially sound avenue for AAPL to obtain access to content. I disagree.

(A) There is a reason Concast (NASDAQ: CMCSA) owns content and distribution. John Malone himself has used and continues to endorse the model. AAPL needs to leverage its enormous ecosystem into a giant distribution platform, and owning/developing content would only enhance the LT economics.

(B) Simply because AAPL does not have a core competency in developing content doesn’t mean buying TWX would be an unprofitable diversion. Using the Berkshire Hathaway model, AAPL could not only incubate TWX properties against short-term ‘Street’ pressures, but reinvest all TWX earnings (and then some) back into more content development.

Content – economically and commercially cyclical – is the perfect business for the long-term oriented BRK model…and with its historically long-term thinking and prodigious cash flows, AAPL is the perfect Berkshire prototype.

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