Does Apple (AAPL) Pass The Four Filters Test?
Warren Buffett and Charles Munger of Berkshire Hathaway (BRK-A),(BRK-B) have both outlined their four filters that they use when selecting investments. These four filters are simple to understand and helps investor's weave through investment ideas.
These are the four filters used by Buffett & Munger:
- The most important thing is to understand the business.
- Look for a business with an enduring competitive advantage.
- Invest with able and trustworthy management.
- Pay a price that makes sense and offers a margins of safety.
Apple is a first class business with first class managment in the form of Tim Cook and his executive team. Over the last few years, Apple has returned over $80 billion to shareholders through buybacks and dividend increases. I believe that Apple will pass the four filters process with flying colors. Buffett and Munger avoid technology companies in general since innovation causes these advantages to erodes. I believe technological innovation won't erode Apple's competitive advantage.
Is Apple's business understandable? Could you explain to a kindergartner in three or less sentences what Apple does?
For example: Apple designs, develops, and sells consumers electronics, computer software, online software and other services. In order to simplify this so that a kindergartner can understand it, Apple sells all those wonderful devices that you and your family love and own.
Does Apple have a durable competitive advantage? That is the million dollar question you have to ask yourself?
I believe that Apple has a durable competitive advantage just like Coca-Cola. Steve Jobs was a brilliant man who couldn't write a single line of programing code, however, he was a genius when it came to marketing and design. Not one of Apple's competitors can beat the company at maximizing profits from consumers by focusing on human psychology. This ability to maximize profits through focusing on human psychology makes Apple second to none. People are willing to stand in a line for hours, or even pay someone to hold their spot so that they can buy the new iPhone. The powerful emotive brand Apple makes is nearly impossible for its competitors to compete with. None of Apple's competitors have the same emotional effect on people that Apple products do. In order to create this emotive brand, Apple had to spend billions through advertisement. Apple's competitors have spent billions but can't make inroads on Apple's hold on consumers. Clearly Apple's competitors can't recreate that connection that the company has with consumers. The reason for this is because Steve Jobs was the genius behind Apple's advertisement campaign from the 1984 commercial to the Think Different campaign. These advertisement campaign's were designed to create the image of an innovated, hip company that boldly looks forward. The heart of Apple's competitive advantage lies within the company's brand.
Does Apple have able and trustworthy management?
I believe that Tim Cook and his team have proven to be able and trustworthy. The company doesn't try to hide thing from its shareholders. Carl Icahn has praised Tim Cook as one of the best CEO's in world, as well as an a example of how a CEO should operate. I agree with Icahn, Tim Cook is a great CEO. Under Tim Cook's leadership, Apple has returned over $80 billion dollars to shareholders over the last few years through share repurchases and dividend increases. I believe that by 2017, Apple will have returned more money than any company in the world to shareholders. Apple is on the path of returning to shareholders a $100 plus billion dollars in less than a decade. No company has ever done that.
Now, the final piece to the puzzle. Is Apple's current share price reasonable and does it offer a margin of safety?
Let's go through some of Apple's statistics. The company has over $200 billion dollars in cash which makes up 32% of Apple's Market Cap. At its current price of $115/share, Apple is selling for a 39% margin of safety to its fair value of $185/share. Apple will continue to repurchase shares and increase its dividend going forward.
Does Apple pass Buffett & Munger's Four Filter test?
I believe the company passes with flying color. If Buffett & Munger were apart of a more recent generation and understood technology better, Apple would undeniably be in Berkshire Hathaway's portfolio. Sadly, Buffett & Munger write off the company because of the innovation rate in technology. They are right that this turnover in innovations makes having a competitive advantage nearly impossible for technology companies. However, I believe that Apple isn't just a technology company. They are a consumer products company with strong brand power like Coca-Cola, and this kind of consumer brand power gives Apple the moat needed to shield the company from erosion.
Published on Aug 8, 2015By Cody Eustice