Either Apple (AAPL) is undervalued or Exxon Mobil is overvalued (XOM).
Perhaps it is a bit of both.
When I put the financial statements of Apple next to Exxon Mobil the superiority of Apple seems very clear to me.
Let me run through the numbers.
Exxon Mobil
Share Count – 4.2 billion
Share Price – $81.23
Market Cap – $342 billion
Net Debt – $25 billion
Enterprise Value – $367 billion
Apple
Share Count – 5.3 billion
Share Price – $140.64
Market Cap – $743 billion
Net Cash – $161 billion
Enterprise Value – $582 billion
First lets note at the value the market is assigning to each of these two companies. Both are huge with Exxon valued as being worth $367 billion and Apple being valued as being worth $582 billion.
Apple’s valuation is just over 50 percent more than Exxon. As I run through the numbers I think you will see that the difference should be much more than that.
From just the data summary above the balance sheet superiority of Apple is impossible to miss. While both companies have long been thought of as pillars of financial strength the reality is that they aren’t even in the same ballpark.
Apple has $160 plus billion of net cash while Exxon has a sizable amount of net debt. That is the balance sheet, what I really want to compare though is the cash coming into and out of these two companies. That is where we can see how good each of these businesses are.
The difference between the two of them is massive. The “capital light” business model of Apple shines through.
Exxon has an enterprise value of $367 billion. For that you get the following financial performance over the past three years.
| XOM (In Billions) | 2016 | 2015 | 2014 | Total |
| Cash Inflow From Operations | $22.1 | $30.3 | $45.1 | $97.5 |
| Cash Outflow For Capital Spending | ($16.2) | ($26.5) | ($32.9) | ($75.6) |
| Cash After Capex | $5.9 | $3.8 | $12.2 | $21.9 |
| Cash Outflow For Dividends | ($12.5) | ($12.1) | ($11.6) | ($36.2) |
| Net Cash Outflow | ($6.6) | ($8.3) | $0.6 | ($14.3) |
| Share Repurchases | ($1.0) | ($4.1) | ($13.2) | ($18.3) |
Source: SEC.gov
After capital spending Exxon has generated $21.9 billion in cash over the past three years. That is roughly six percent of its total enterprise value.
Last year Exxon generated $5.9 billion of cash flow after capital spending. For the $367 billion enterprise value you get a business that generates $5.9 billion in cash flow.
That would be a free cash yield of just 1.6 percent ($5.9 billion / $367 billion).
There is an argument to be made that some of that capital spending relates to growth initiatives and that is true. However if you actually look at how little growth this company has generated internally over the past decade you would view that suggestion with a massive grain of salt.
At least the business has generated some free cash flow. What the company has done with that cash flow leaves me scratching my head.
Over the past 3 years $21.9 billion of cash flow has been generated after capital spending. Exxon has paid out far more than that in dividends with $36.2 billion having been distributed.
That is not sustainable as the dividend has been underfunded by $14.3 billion and not the way that I would run a business, although I don’t have to answer to the fickle stock market.
On top of that Exxon has used another $18.3 billion to repurchase shares over the past three years. Combined with the dividend that is a $32.6 billion hole dug right into the company’s balance sheet.
For a company thought to be such a powerful blue chip, these are ugly numbers.
Next to Exxon, Apple’s numbers look just incredible.
Off of a $582 billion enterprise value (just 50 percent larger than Exxon) Apple has generated $173.3 billion in cash flow after capital spending over the past three years. That is 30 percent of the company’s enterprise value over those three years (Exxon generated six percent).
| AAPL (In Billions) | 2016 | 2015 | 2014 | Total |
| Cash Inflow From Operations | $65.8 | $81.2 | $59.7 | $206.7 |
| Cash Outflow For Capital Spending | ($12.7) | ($11.2) | ($9.5) | ($33.4) |
| Cash After Capex | $53.1 | $70.0 | $50.2 | $173.3 |
| Cash Outflow For Dividends | ($12.1) | ($11.5) | ($11.1) | ($34.7) |
| Net Cash Outflow | $41.0 | $58.5 | $39.1 | $138.6 |
| Share Repurchases | ($30.0) | ($35.0) | ($45.0) | ($110.0) |
Source: SEC.gov
Last year Apple generated $53.1 billion of cash flow after capital spending (about 10 times what Exxon generated). Where Exxon’s enterprise value to free cash flow after capex is 62.2 times Apple is valued at 10.9 times.
On a post capex free cash flow yield that would be 1.6 percent versus 9.1 percent for Apple.
Not even close.
I don’t see why Apple’s capital spending should be viewed any differently than Exxon’s in terms of the ability of that spending to generate growth so I’ve treated them both the same.
Over the past 3 years Apple has generated $173.3 billion in cash flow after capital spending. Against that $34.7 billion has been paid out as dividends making Apple’s dividend extremely sustainable with huge room for growth if desired.
Of the $138 billion Apple has left over after dividends the company is able to buy back massive amounts of shares while still strengthening its already fantastic balance sheet.
Apple’s shareholder distributions are more than sustainable. Exxon’s shareholder distributions are not unless commodity prices change significantly.
When I set out to put these numbers on paper I had a rough idea of what to expect. Just how bad Exxon looks next to Apple shocked me.
How Exxon has an enterprise value that is two-thirds of Apple’s is beyond me. The valuation difference should be much larger in my opinion.
- Apple’s balance sheet is far superior
- Apple has generated eight times the cash flow after capital spending over the past three years (and just a 50 percent larger valuation)
- Apple’s dividend could be doubled or tripled with no problem while Exxon’s dividend is unsustainable at current commodity prices
If you gave me $10,000 and told me I had to invest it in one of these companies there wouldn’t be a second of hesitation as to which would be the correct choice.
I wouldn’t even accept the argument that Apple has a bigger threat of future technological obsolescence because I believe that the transition away from fossil fuels could happen much faster than many people think.
This one is a slam dunk case for Apple.