Is Berkshire Hathaway right about Apple?

A lot of value investors were pleasantly surprised in May when Berkshire Hathaway (NYSE: BRK.A) announced that it had purchased 9.81 million shares of Apple (NASDAQ: AAPL). Apple zombies were pleased again in July; when they learned that Berkshire had gobbled up another 5.42 million shares.

That means Warren’s company now holds around 15.2 million shares of Apple. Naturally a lot of people will be wondering if that makes Apple a widows and orphans stock. Widows and orphans stock is an old slang term that refers to an equity which is so safe persons with no outside income can invest in it.

My answer would be yes because of the financial data and not Berkshire’s actions. Apple is a really great stock, the big question we need to ask here is why it took Uncle Warren so long to see the obvious. The financial data I found at ycharts shows that Berkshire Hathaway’s (NYSE: BRK.B) decision makers made a very wise move by buying those shares.

Apple is undervalued

A close look at the data shows us that Berkshire got a tremendous bargain in Apple. Here’s what an investor got for the $104.2 she or he invested in a share of Apple on September 8, 2016:

• Revenues of $220.29 billion on June 30, 2016.

 

• A net income of $47.80 billion on June 30, 2016.

 

• A diluted earnings per share number of 18.4%

 

• A dividend yield of 2.02%.

• A free cash flow of $7.729 billion.

 

• Total assets of $305.60 billion.

 

• Cash and short term investments of $61.76 billion.

 

• $63.17 billion in cash from operations.

 

So it is easy to see what the folks in Berkshire saw at Apple – cash and a lot of it. That cash is being paid back to investors in the form of a dividend for the first time; it was 57¢ a share on August 11, 2016, the last dividend date. What’s important though is Apple has been paying a dividend at least three times a year; for the past four years.

That makes it a reliable source of extra income; which is why Berkshire Hathaway bought it. Another reason for the investment is the return on equity which was 37.92% on June 30, 2016 that makes Apple a growth stock as well.

Apple is definitely undervalued with a market cap of $562.07 billion; and an enterprise value of $591.77 billion on September 8, 2016. It’s out of favor with Mr. Market for reasons I cannot fathom so Buffett grabbed it.

Should Investors be Worried about Apple’s Revenue Drop

There is one number in Apple’s financials that might be scaring investors away and strangely enough it is revenue. Apple’s revenue has shown some serious decline over the past year.

Back in June 2015 Apple reported revenues of $224.34 billion that fell to $220.29 billion in June 2016. That makes for a decline of $4.05 billion in a year. What’s more worrisome is the drop over the six months between fourth quarter 2015 and second quarter 2016.

Apple entered 2016 with revenues of $234.99 billion in December 2015 that fell to $220.29 billion in June. That makes for a loss of $14.70 billion in just six months which shows us why some investors have been spooked by this stock.

To add to the fear those revenues did lead to a loss of net income. Apple reported a net income of $53.7 billion in December 2015 that fell to $47.8 billion June 2016. That equals a drop of $5.93 billion in six months which is scary. Apple’s net income in June 2016 was also lower than a year earlier; when it was $50.74 billion in June 2015.

Apple is Suffering Losses

This means Apple is suffering some losses but it can easily afford. Apple is such a good company that it can afford to lose two thirds of its net income and still make a lot of money. It could lose half or more of its revenue and still make money.

That’s what makes it a widows and orphans stock, no matter what happens it will make money for the foreseeable future perhaps the next 10 years or so. This reminds me of another major Buffett investment; Walmart Stores Inc. (NYSE: WMT). Like Apple, Walmart has so much money $483.83 billion in revenues in June 2016; that it can survive what would be catastrophic losses for the average company several times over.

More importantly it is a steady income producer that produces a dividend. This will also remind some investors of major oil companies like Exxon-Mobil (NYSE: XOM) in their heyday. It is no coincidence that Berkshire liquidated its Exxon-Mobil and bought Apple in the past year.

The new management clearly understands where the money will come from in the future; as does Buffett who wants his company making money for a long time to come. Those of us who want a safe investment for retirement or just to produce some extra income for the next few years would be well-advised to put Apple in their portfolios.

It proves that Berkshire Hathaway still has what it takes, and there are still lots of good stocks out there. Apple is one of the best, so it is well worth a look for those into buy and hold. This stock is about to grow in price and grow massively.