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mandyt25
2021-08-27

An Apple insights. Interesting piece of reading !

Apple Inc.: Jobs' Era Vs. Cook's Era

Summary My last article on Apple Inc. was performed under a framework that I call the Buffett’s 10x

Apple Inc.: Jobs' Era Vs. Cook's Era

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{"i18n":{"language":"zh_CN"},"data":{"magic":2,"id":810423389,"tweetId":"810423389","gmtCreate":1629993847941,"gmtModify":1704954385366,"author":{"id":4088157638983690,"idStr":"4088157638983690","authorId":4088157638983690,"authorIdStr":"4088157638983690","name":"mandyt25","avatar":"https://static.tigerbbs.com/94eee74711de9fa6cffcbb6e721fb7c7","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":28,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body>An Apple insights. Interesting piece of reading !</body></html>","htmlText":"<html><head></head><body>An Apple insights. Interesting piece of reading !</body></html>","text":"An Apple insights. Interesting piece of reading !","highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/810423389","repostId":1168256001,"repostType":4,"repost":{"id":"1168256001","kind":"news","pubTimestamp":1629988691,"share":"https://ttm.financial/m/news/1168256001?lang=&edition=full","pubTime":"2021-08-26 22:38","market":"us","language":"en","title":"Apple Inc.: Jobs' Era Vs. Cook's Era","url":"https://stock-news.laohu8.com/highlight/detail?id=1168256001","media":"seekingalpha","summary":"Summary\n\nMy last article on Apple Inc. was performed under a framework that I call the Buffett’s 10x","content":"Summary\n<ul>\n <li>My last article on Apple Inc. was performed under a framework that I call the Buffett’s 10x Pretax Rule, with a particular focus on its valuation and compounding power.</li>\n <li>And this article analyzes a different aspect: the timing. The analysis attempts to shed insights into the timing when Buffett pulled the trigger on his elephant gun.</li>\n <li>The results show the different profitability drivers of AAPL during Steve Jobs’ era and Tim Cook’s era and provide useful insights for value investors.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/4a28673a5b20078b3787241b02c6c9d4\" tg-width=\"768\" tg-height=\"512\" width=\"100%\" height=\"auto\">Nikada/iStock Unreleased via Getty Images\nThe investment thesis\nIf you are reading this, chances are that you already know that Apple Inc. (AAPL) is the largest position in Warren Buffett's Berkshire Hathaway portfolio. My&nbsp;last article&nbsp;on AAPL was performed under a framework that I call Buffett's 10x Pretax Rule, with a particular focus on its valuation and compounding power.\nAnd this article analyzes a different aspect: the timing. Buffett bought the majority of his APPL shares during 2016 and 2017: a total of 661M shares, about 4% of the total shares currently outstanding. However, as to be seen in the remainder of this article, the profitability of the business was in rapid decline during 2016 and 2017 as measured by the return on capital employed (\"ROCE\"). So I was intrigued by the timing of Buffett's purchase.\nThe analysis shares my attempts to answer my own question using a so-called DuPont analysis. The results show the different profitability drivers of AAPL during Steve Jobs' era and Tim Cook's era. As to be seen by the results later, as a person, I love and even idolize Steve Jobs for his vision and relentless innovation-first style. His vision and innovation - when worked - created an astronomical level of profitability, but is difficult to sustain. But as an investor, especially a long-term and value-driven investor, I feel more comfortable with Tim Cook with his focus on operation and existing products. As to be seen by the results, profitability seemed to be lower on the surface, but upon a closer look, the quality of the earnings is actually improved and became more sustainable. I hope these results provide useful insights not only for AAPL investors but also for investors interested in other stocks.\nOverview and recap\nHere, I will first provide a brief recap of my last article to facilitate the new discussion today. If you're a devout Buffett cultist like this author, you must have noticed or heard that the grandmaster paid ~10x pretax earnings for many of his largest and best deals. The list is a really long one, ranging from Coca-Cola, American Express, Wells Fargo, Walmart, Burlington Northern, and of course the more recent AAPL purchase and his recent $25B&nbsp;repurchases of BRK&nbsp;shares as analyzed in my earlier article.\nThe following chart shows the price history of AAPL and its 10x pretax earnings since 2010. Pretax earnings are also referred to as \"EBT\", Earnings Before Taxes, in this article. As seen, Buffett made his purchases during 2016-2017 when the price is below or near 10x EBT. I was lucky enough to have made the AAPL purchases at that time myself too.\nAnd the thesis was that if we paid 10x pretax and bought a business that stagnates forever, it is an investment that offers a 10% pretax return already, equivalent to a 10% bond. Not the best investment ever, but not that bad either. If we get a business that offersanygrowth like AAPL, then we will be buying an above-average business at an average price. It is now equivalent to buying a 10% yield bond with a built-in growth of coupon payments. And we will have a large chance of a double-digit return compounding for a long time (if you hold onto it long enough like Buffett).\nAnd AAPL is a business that is very like to keep growing as to be elaborated next.\n<img src=\"https://static.tigerbbs.com/9eec812a3eda60f950a1890eebc7dd34\" tg-width=\"640\" tg-height=\"359\" width=\"100%\" height=\"auto\">Source: Author based on Seeking Alpha data\nSo are there any reasons fundamental to this 10x pretax rule, or is it only a bunch of pure coincidences? I think it is the former and there are indeed many good reasons for this rule, as listed below.\nROCE and perpetual autonomous growth potential\nWhen we think like a long-term business owner, not a stock trader, a key metric (the most important metric in my opinion) is the return on capital employed (ROCE). ROCE measures the return of capitalactuallyemployed in a business. And it, therefore, provides fundamental insights into profitability. ROCE is fundamentally important in many ways. A consistent and high ROCE is the hallmark of a business with a sustainable moat. A consistent and high ROCE also shows how effectively the reinvested income can be used to fuel further earnings growth because, in the long term, the growth rate is given by:\nLong term growth rate = ROCE * Reinvestment Rate\nThus a higher ROCE allows a business to reinvest less of its earnings and grow more at the same time. A key combination for a long-term compounder. To estimate the ROCE of businesses like AAPL, I consider the following items capital actually employed:\n1. Working capital, including payables, receivables, inventory. These are the capitals required for the daily operation of their businesses.\n2. Gross Property, Plant, and Equipment. These are the capitals required to actually conduct business and manufacture their products.\n3. Research and development expenses (an essential expense for a business like AAPL).\nBased on the above considerations, the ROCE of AAPL over the past decade is shown below. As seen, it was able to maintain an astronomical level of ROCE at the beginning of the decade, when Steve Jobs left the CEO position. The average ROCE between 2010 to 2012 was near a level of around 443%. Every $1 reinvested in the business can generate more than $4 of additional earning! Since Tim Cook took over, the profitability gradually lowered to the current level of 183%.\nTo help put things under perspective, the next chart shows the ROCE of a few other Buffett-style stocks. The ROCE data are directly pulled from my previous analyses. And in case you want to see the details of how I got these numbers, you can look up my recent articles under these tickers.\nAs seen, the profitability during Jobs' era was truly astronomical, thanks to all the innovations that profoundly changed the world. And the current level of 183%, the \"declined\" level, is still very competitive relative to other high-quality businesses.\n<img src=\"https://static.tigerbbs.com/cb073458b1726a64be72be41af90a7b6\" tg-width=\"640\" tg-height=\"360\" width=\"100%\" height=\"auto\">Source: Author and Seeking Alpha.\n<img src=\"https://static.tigerbbs.com/773b42d84964aa81732fe7e60ce2e815\" tg-width=\"640\" tg-height=\"311\" width=\"100%\" height=\"auto\">Source: Author and Seeking Alpha.\nWhy Buffett bought at a time with rapidly declining profitability?\nWith the above results, the question that puzzled me was why Buffett bought at a time with rapidly declining profitability? As seen from the results above, the profitability of the business was in rapid decline during 2016 and 2017, when Buffett bought the majority of his shares. The following analysis shares my attempts to answer this question using a so-called DuPont framework. The results show the different profitability drivers of AAPL during Steve Jobs' era and Tim Cook's era.\nThe DuPont framework is a tool for analyzing profitability at a fundamental level. It was a general tool and by no means specific to the DuPont business. However, it was popularized by the DuPont Corporation and the name stuck. The DuPont was originally developed to pinpoint issues to improve return on equity (\"ROE\"). In the application here, I made a few modifications to suit the unique situation of AAPL (and modern corporations in general). I will detail the modifications as we go.\nThe first modification is that I will use the framework to analyze ROCE instead of ROE. The reasons are aforementioned. And to recap, the first main reason is that ROCE is more fundamentally important than ROE. And secondly, the ROE concept is not even applicable at all to many modern corporations where their share equity is very small or even negative, because more and more corporations have decided to return all share equity to shareholders as they rely more and more on their intangible assets to make a profit.\nUnder the DuPont framework, there are three knobs that management can turn to drive up ROCE: profit margin (\"PM\"), asset turnover ratio (\"ATR\"), and leverage. Through simple math, we can show that ROCE is just the product of these three things, i.e.,\nROCE = PM x ATR x leverage.\nWhere PM here is defined as operating income divided by total revenue, ATR is defined as total revenue divided by total asset, and leverage is defined as total asset divided by total capital employed. And here is the second modification that I made to the original DuPont method. I defined leverage as the ratio between total asset divided and total capital employed, instead of the total asset divided by share equity. And again, the reason is that the original definition is not even applicable at all to many modern corporations where their share equity is very small or even negative. The new definition could be understood as effective leverage. It's leverage against the business' working capital (payables, receivables, and inventory), gross property, plant, equipment, et al. If these things represent the share equity in an accounting sense, then the effective leverage will be the same as the original definition. If not, then the effective leverage makes more sense to me. No matter what is the share equity in the accounting sense, a corporation always requires capital to make a profit.\nAAPL's profitability drivers\nBased on the above discussions, the following three charts show the three knobs for AAPL over the past decade. As can be seen from the first chart, the profit margin has declined from about 32.9% at the beginning of the decade to the current level of 26.7% - a 20.9% decrease. On average, the profit margin for the overall economy fluctuates around 8% and rarely goes above 10%. Of course, this is an average across all business sectors. Nonetheless, as a rule of thumb, 10% is a very healthy profit margin and 20% is a very high margin. AAPL's 32.9% margin at the beginning of the decade was due to the innovations that profoundly changed the world and their near-monopoly status. It is difficult to sustain. You cannot expect to invent a new earthshaking product like the iPhone before 2011 every a few years. And the current level of 26.7% is still very high.\n<img src=\"https://static.tigerbbs.com/62fc5d093753a57ae672d3726f14afec\" tg-width=\"640\" tg-height=\"343\" width=\"100%\" height=\"auto\">Source: Author and Seeking Alpha data.\nThe second chart shows the ATR driver. The ATR measures how efficiently a company uses its assets to generate revenue. The higher the ATR, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets. As seen, AAPL's ATR started around 0.88 at the beginning of the decade, declined to about 0.6 in the mid, and bounced back to the current level of 0.94. Overall, the ATR has improved 6.4% over the decade. Unlike innovations, ATR is a knob that management can consistently tweak and improve. And Tim Cook, with his tremendous experiences and insights as the former Chief Operating Officer, certainly has done an excellent job. A notable example was his decision to replace Apple's own factories and warehouses with contractors, a decision that led to a reduction of the company's inventory from months to days.\n<img src=\"https://static.tigerbbs.com/ccbba3d838ca6ffb8b0e4574e2908eed\" tg-width=\"640\" tg-height=\"345\" width=\"100%\" height=\"auto\">Source: Author and Seeking Alpha data.\nThis third and last chart shows the biggest driver for the profitability change. It shows that Tim Cook reduced the effective leverage from an average level of ~15x at the beginning of the decade, to the current level of 7.3, a 74% decrease. So the ROCE declined from 443% in the Jobs' era to the current level of 183% was largely due to the decrease in leverage. As a result, the decline of ROCE is not as bad as it seemed on the surface. The quality of the profit has been improved and became more sustainable.\n<img src=\"https://static.tigerbbs.com/d1c7f2ce039418c7258342046a887042\" tg-width=\"640\" tg-height=\"331\" width=\"100%\" height=\"auto\">Source: Author and Seeking Alpha data.\nPutting it all together\nThe following table summarizes the above profitability drivers. And for more visual-oriented readers, the chart below it visualizes the numbers in a waterfall plot. Note that all the changes quoted here are the so-called logarithm changes. For readers who are not familiar with logarithm changes, it is the \"more scientific\" way of measuring changes when there are multiple factors involved - more scientific than the simple arithmetic changes we routinely quote.\nLet's use a simple example to illustrate. Let's consider the calculation of dividend yield for a stock. The dividend yield depends on two things - the dividend and the price, so it will illustrate why the logarithm change is the \"more scientific\" way of measuring change when multiple factors are involved. Consider an example when a stock's dividend increases by 10% and price drops by 10% - in the arithmetic sense we talked about. The dividend yield would increase, but it willnotincrease by 20%. It would actually increase by 22.22%. In other words, the dividend yield change is not equal to the sum of the arithmetic change in the dividend and the price.\nNow in logarithm terms, things become simpler and more intuitive in a certain way. The logarithm changes involved in this example are: 9.52% for the dividend (logarithm of 110% = 9.52%), -10.54% for the price (logarithm of 90% = -10.54%), and 20.06% for the dividend yield (logarithm of 122.22% = 20.06%). So as you can see, the change of dividend yield is now equal to the sum of the changes in the dividend and the price (20.06% = 9.52% + 10.54%).\nWith this digression, now the summary of the profitability drivers for AAPL. As seen from the table and the chart, the ROCE has decreased by 88.4% over the decade (again we are talking in the logarithm terms here and hereafter). It seems pretty bad until we look at the knobs that Cook turned. Out of the 88.4% decrease, 74% of it came from the decreased leverage, which is actually a good thing to me. The next biggest contributor came from the decrease in PM, a 20.9% decrease. It is unfortunate, never a good thing to see profit margin decrease. But I would like to argue the level of PM enjoyed by AAPL (or any business) during a period of technological monopoly is not really sustainable. And lastly, the ATR has contributed a positive 6.4% to the change. As aforementioned, unlike technological innovations, ATR is a knob that management can consistently tweak and improve. And Tim Cook certainly is an operation master (not implying that he is not fantastic in other ways).\n<img src=\"https://static.tigerbbs.com/5c8ab37ef43d6df7e215214aaf8e33eb\" tg-width=\"640\" tg-height=\"303\" width=\"100%\" height=\"auto\">Source: Author and Seeking Alpha data.\n<img src=\"https://static.tigerbbs.com/03243108e67063bf027112a201a0cac9\" tg-width=\"640\" tg-height=\"300\" width=\"100%\" height=\"auto\">Source: Author and Seeking Alpha data.\nConclusion and final thought\nMylast articleon AAPL was performed under a framework that I call Buffett's 10x Pretax Rule, with a particular focus on its valuation and compounding power. The thesis was that when Buffett bought AAPL during 2016~2017 at a price around 10x pretax earnings, it was equivalent to buying a 10% yield bond even if the business stagnates forever. If he gets ANY growth, then he will be buying a 10% yield bond with a built-in growth of coupon payments. And as shown in my last article, AAPL is a business that is very like to keep growing due to its high ROCE and capital allocation flexibility.\nThis article analyzes a different aspect: the timing. Buffett bought the majority of his APPL shares during 2016 and 2017. However, as seen in this article, the profitability of the business was in rapid decline during 2016 and 2017 as measured by the return on capital employed (\"ROCE\"). So I was intrigued by the timing of Buffett's purchase.\nUsing the so-called DuPont analysis (with some modifications), the results show that the profitability drivers of AAPL have changed substantially from Steve Jobs' era and Tim Cook's era. The ROCE has decreased by 88.4% over the decade, which seems pretty bad until we look closer at the knobs that Cook turned. Out of the 88.4% decrease, 74% of it came from the decreased leverage, which is actually a good thing to me. Tim Cook also stabilized (slightly improved) the asset turnover rate, which contributed a positive 6.4% to the change of ROCE. Unlike technological innovations, ATR is a knob that management can consistently tweak and improve. The decreased leverage and improved ATR have actually improved ROCE in a way and made it more sustainable. I think this is in line with Buffett's philosophy of buying businesses that can be run by a fool one day - or at least buying business that does not require a once-in-a-generation genius to run.","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple Inc.: Jobs' Era Vs. Cook's Era</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple Inc.: Jobs' Era Vs. Cook's Era\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-08-26 22:38 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4451809-apple-inc-jobs-era-vs-cooks-era>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nMy last article on Apple Inc. was performed under a framework that I call the Buffett’s 10x Pretax Rule, with a particular focus on its valuation and compounding power.\nAnd this article ...\n\n<a href=\"https://seekingalpha.com/article/4451809-apple-inc-jobs-era-vs-cooks-era\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4451809-apple-inc-jobs-era-vs-cooks-era","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1168256001","content_text":"Summary\n\nMy last article on Apple Inc. was performed under a framework that I call the Buffett’s 10x Pretax Rule, with a particular focus on its valuation and compounding power.\nAnd this article analyzes a different aspect: the timing. The analysis attempts to shed insights into the timing when Buffett pulled the trigger on his elephant gun.\nThe results show the different profitability drivers of AAPL during Steve Jobs’ era and Tim Cook’s era and provide useful insights for value investors.\n\nNikada/iStock Unreleased via Getty Images\nThe investment thesis\nIf you are reading this, chances are that you already know that Apple Inc. (AAPL) is the largest position in Warren Buffett's Berkshire Hathaway portfolio. My last article on AAPL was performed under a framework that I call Buffett's 10x Pretax Rule, with a particular focus on its valuation and compounding power.\nAnd this article analyzes a different aspect: the timing. Buffett bought the majority of his APPL shares during 2016 and 2017: a total of 661M shares, about 4% of the total shares currently outstanding. However, as to be seen in the remainder of this article, the profitability of the business was in rapid decline during 2016 and 2017 as measured by the return on capital employed (\"ROCE\"). So I was intrigued by the timing of Buffett's purchase.\nThe analysis shares my attempts to answer my own question using a so-called DuPont analysis. The results show the different profitability drivers of AAPL during Steve Jobs' era and Tim Cook's era. As to be seen by the results later, as a person, I love and even idolize Steve Jobs for his vision and relentless innovation-first style. His vision and innovation - when worked - created an astronomical level of profitability, but is difficult to sustain. But as an investor, especially a long-term and value-driven investor, I feel more comfortable with Tim Cook with his focus on operation and existing products. As to be seen by the results, profitability seemed to be lower on the surface, but upon a closer look, the quality of the earnings is actually improved and became more sustainable. I hope these results provide useful insights not only for AAPL investors but also for investors interested in other stocks.\nOverview and recap\nHere, I will first provide a brief recap of my last article to facilitate the new discussion today. If you're a devout Buffett cultist like this author, you must have noticed or heard that the grandmaster paid ~10x pretax earnings for many of his largest and best deals. The list is a really long one, ranging from Coca-Cola, American Express, Wells Fargo, Walmart, Burlington Northern, and of course the more recent AAPL purchase and his recent $25B repurchases of BRK shares as analyzed in my earlier article.\nThe following chart shows the price history of AAPL and its 10x pretax earnings since 2010. Pretax earnings are also referred to as \"EBT\", Earnings Before Taxes, in this article. As seen, Buffett made his purchases during 2016-2017 when the price is below or near 10x EBT. I was lucky enough to have made the AAPL purchases at that time myself too.\nAnd the thesis was that if we paid 10x pretax and bought a business that stagnates forever, it is an investment that offers a 10% pretax return already, equivalent to a 10% bond. Not the best investment ever, but not that bad either. If we get a business that offersanygrowth like AAPL, then we will be buying an above-average business at an average price. It is now equivalent to buying a 10% yield bond with a built-in growth of coupon payments. And we will have a large chance of a double-digit return compounding for a long time (if you hold onto it long enough like Buffett).\nAnd AAPL is a business that is very like to keep growing as to be elaborated next.\nSource: Author based on Seeking Alpha data\nSo are there any reasons fundamental to this 10x pretax rule, or is it only a bunch of pure coincidences? I think it is the former and there are indeed many good reasons for this rule, as listed below.\nROCE and perpetual autonomous growth potential\nWhen we think like a long-term business owner, not a stock trader, a key metric (the most important metric in my opinion) is the return on capital employed (ROCE). ROCE measures the return of capitalactuallyemployed in a business. And it, therefore, provides fundamental insights into profitability. ROCE is fundamentally important in many ways. A consistent and high ROCE is the hallmark of a business with a sustainable moat. A consistent and high ROCE also shows how effectively the reinvested income can be used to fuel further earnings growth because, in the long term, the growth rate is given by:\nLong term growth rate = ROCE * Reinvestment Rate\nThus a higher ROCE allows a business to reinvest less of its earnings and grow more at the same time. A key combination for a long-term compounder. To estimate the ROCE of businesses like AAPL, I consider the following items capital actually employed:\n1. Working capital, including payables, receivables, inventory. These are the capitals required for the daily operation of their businesses.\n2. Gross Property, Plant, and Equipment. These are the capitals required to actually conduct business and manufacture their products.\n3. Research and development expenses (an essential expense for a business like AAPL).\nBased on the above considerations, the ROCE of AAPL over the past decade is shown below. As seen, it was able to maintain an astronomical level of ROCE at the beginning of the decade, when Steve Jobs left the CEO position. The average ROCE between 2010 to 2012 was near a level of around 443%. Every $1 reinvested in the business can generate more than $4 of additional earning! Since Tim Cook took over, the profitability gradually lowered to the current level of 183%.\nTo help put things under perspective, the next chart shows the ROCE of a few other Buffett-style stocks. The ROCE data are directly pulled from my previous analyses. And in case you want to see the details of how I got these numbers, you can look up my recent articles under these tickers.\nAs seen, the profitability during Jobs' era was truly astronomical, thanks to all the innovations that profoundly changed the world. And the current level of 183%, the \"declined\" level, is still very competitive relative to other high-quality businesses.\nSource: Author and Seeking Alpha.\nSource: Author and Seeking Alpha.\nWhy Buffett bought at a time with rapidly declining profitability?\nWith the above results, the question that puzzled me was why Buffett bought at a time with rapidly declining profitability? As seen from the results above, the profitability of the business was in rapid decline during 2016 and 2017, when Buffett bought the majority of his shares. The following analysis shares my attempts to answer this question using a so-called DuPont framework. The results show the different profitability drivers of AAPL during Steve Jobs' era and Tim Cook's era.\nThe DuPont framework is a tool for analyzing profitability at a fundamental level. It was a general tool and by no means specific to the DuPont business. However, it was popularized by the DuPont Corporation and the name stuck. The DuPont was originally developed to pinpoint issues to improve return on equity (\"ROE\"). In the application here, I made a few modifications to suit the unique situation of AAPL (and modern corporations in general). I will detail the modifications as we go.\nThe first modification is that I will use the framework to analyze ROCE instead of ROE. The reasons are aforementioned. And to recap, the first main reason is that ROCE is more fundamentally important than ROE. And secondly, the ROE concept is not even applicable at all to many modern corporations where their share equity is very small or even negative, because more and more corporations have decided to return all share equity to shareholders as they rely more and more on their intangible assets to make a profit.\nUnder the DuPont framework, there are three knobs that management can turn to drive up ROCE: profit margin (\"PM\"), asset turnover ratio (\"ATR\"), and leverage. Through simple math, we can show that ROCE is just the product of these three things, i.e.,\nROCE = PM x ATR x leverage.\nWhere PM here is defined as operating income divided by total revenue, ATR is defined as total revenue divided by total asset, and leverage is defined as total asset divided by total capital employed. And here is the second modification that I made to the original DuPont method. I defined leverage as the ratio between total asset divided and total capital employed, instead of the total asset divided by share equity. And again, the reason is that the original definition is not even applicable at all to many modern corporations where their share equity is very small or even negative. The new definition could be understood as effective leverage. It's leverage against the business' working capital (payables, receivables, and inventory), gross property, plant, equipment, et al. If these things represent the share equity in an accounting sense, then the effective leverage will be the same as the original definition. If not, then the effective leverage makes more sense to me. No matter what is the share equity in the accounting sense, a corporation always requires capital to make a profit.\nAAPL's profitability drivers\nBased on the above discussions, the following three charts show the three knobs for AAPL over the past decade. As can be seen from the first chart, the profit margin has declined from about 32.9% at the beginning of the decade to the current level of 26.7% - a 20.9% decrease. On average, the profit margin for the overall economy fluctuates around 8% and rarely goes above 10%. Of course, this is an average across all business sectors. Nonetheless, as a rule of thumb, 10% is a very healthy profit margin and 20% is a very high margin. AAPL's 32.9% margin at the beginning of the decade was due to the innovations that profoundly changed the world and their near-monopoly status. It is difficult to sustain. You cannot expect to invent a new earthshaking product like the iPhone before 2011 every a few years. And the current level of 26.7% is still very high.\nSource: Author and Seeking Alpha data.\nThe second chart shows the ATR driver. The ATR measures how efficiently a company uses its assets to generate revenue. The higher the ATR, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets. As seen, AAPL's ATR started around 0.88 at the beginning of the decade, declined to about 0.6 in the mid, and bounced back to the current level of 0.94. Overall, the ATR has improved 6.4% over the decade. Unlike innovations, ATR is a knob that management can consistently tweak and improve. And Tim Cook, with his tremendous experiences and insights as the former Chief Operating Officer, certainly has done an excellent job. A notable example was his decision to replace Apple's own factories and warehouses with contractors, a decision that led to a reduction of the company's inventory from months to days.\nSource: Author and Seeking Alpha data.\nThis third and last chart shows the biggest driver for the profitability change. It shows that Tim Cook reduced the effective leverage from an average level of ~15x at the beginning of the decade, to the current level of 7.3, a 74% decrease. So the ROCE declined from 443% in the Jobs' era to the current level of 183% was largely due to the decrease in leverage. As a result, the decline of ROCE is not as bad as it seemed on the surface. The quality of the profit has been improved and became more sustainable.\nSource: Author and Seeking Alpha data.\nPutting it all together\nThe following table summarizes the above profitability drivers. And for more visual-oriented readers, the chart below it visualizes the numbers in a waterfall plot. Note that all the changes quoted here are the so-called logarithm changes. For readers who are not familiar with logarithm changes, it is the \"more scientific\" way of measuring changes when there are multiple factors involved - more scientific than the simple arithmetic changes we routinely quote.\nLet's use a simple example to illustrate. Let's consider the calculation of dividend yield for a stock. The dividend yield depends on two things - the dividend and the price, so it will illustrate why the logarithm change is the \"more scientific\" way of measuring change when multiple factors are involved. Consider an example when a stock's dividend increases by 10% and price drops by 10% - in the arithmetic sense we talked about. The dividend yield would increase, but it willnotincrease by 20%. It would actually increase by 22.22%. In other words, the dividend yield change is not equal to the sum of the arithmetic change in the dividend and the price.\nNow in logarithm terms, things become simpler and more intuitive in a certain way. The logarithm changes involved in this example are: 9.52% for the dividend (logarithm of 110% = 9.52%), -10.54% for the price (logarithm of 90% = -10.54%), and 20.06% for the dividend yield (logarithm of 122.22% = 20.06%). So as you can see, the change of dividend yield is now equal to the sum of the changes in the dividend and the price (20.06% = 9.52% + 10.54%).\nWith this digression, now the summary of the profitability drivers for AAPL. As seen from the table and the chart, the ROCE has decreased by 88.4% over the decade (again we are talking in the logarithm terms here and hereafter). It seems pretty bad until we look at the knobs that Cook turned. Out of the 88.4% decrease, 74% of it came from the decreased leverage, which is actually a good thing to me. The next biggest contributor came from the decrease in PM, a 20.9% decrease. It is unfortunate, never a good thing to see profit margin decrease. But I would like to argue the level of PM enjoyed by AAPL (or any business) during a period of technological monopoly is not really sustainable. And lastly, the ATR has contributed a positive 6.4% to the change. As aforementioned, unlike technological innovations, ATR is a knob that management can consistently tweak and improve. And Tim Cook certainly is an operation master (not implying that he is not fantastic in other ways).\nSource: Author and Seeking Alpha data.\nSource: Author and Seeking Alpha data.\nConclusion and final thought\nMylast articleon AAPL was performed under a framework that I call Buffett's 10x Pretax Rule, with a particular focus on its valuation and compounding power. The thesis was that when Buffett bought AAPL during 2016~2017 at a price around 10x pretax earnings, it was equivalent to buying a 10% yield bond even if the business stagnates forever. If he gets ANY growth, then he will be buying a 10% yield bond with a built-in growth of coupon payments. And as shown in my last article, AAPL is a business that is very like to keep growing due to its high ROCE and capital allocation flexibility.\nThis article analyzes a different aspect: the timing. Buffett bought the majority of his APPL shares during 2016 and 2017. However, as seen in this article, the profitability of the business was in rapid decline during 2016 and 2017 as measured by the return on capital employed (\"ROCE\"). So I was intrigued by the timing of Buffett's purchase.\nUsing the so-called DuPont analysis (with some modifications), the results show that the profitability drivers of AAPL have changed substantially from Steve Jobs' era and Tim Cook's era. The ROCE has decreased by 88.4% over the decade, which seems pretty bad until we look closer at the knobs that Cook turned. Out of the 88.4% decrease, 74% of it came from the decreased leverage, which is actually a good thing to me. Tim Cook also stabilized (slightly improved) the asset turnover rate, which contributed a positive 6.4% to the change of ROCE. Unlike technological innovations, ATR is a knob that management can consistently tweak and improve. The decreased leverage and improved ATR have actually improved ROCE in a way and made it more sustainable. I think this is in line with Buffett's philosophy of buying businesses that can be run by a fool one day - or at least buying business that does not require a once-in-a-generation genius to run.","news_type":1,"symbols_score_info":{"AAPL":0.9}},"isVote":1,"tweetType":1,"viewCount":875,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":["AAPL"],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":42,"xxTargetLangEnum":"ORIG"},"commentList":[],"hasMoreComment":false,"orderType":2}