My calculation of intrinsic value for Apple Inc.

On my 17th Oct post I calculated Apple Inc's intrinsic value was about $343,37 per share base on my old calculation method. It was trading at $306.73 base on 19th Nov US market closing price.

Now I want to apply Morningstar's calculation method to work out the intrinsic value and make a comparison here.

AAPL

Current year (2010) FCF: 16,590M
Estimated next 10 yrs FCF growth rate: 10%
Perpetuity growth rate (g): 7%
Discount rate (R): 15%

Step 1: Forecast FCF for the next 10 years

2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
18,249	20,074	22,081	24,289	26,718	29,390	32,329	35,562	39,118	43,030

Step 2: Discount these FCFs to reflect the present value

2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
18,249	20,074	22,081	24,289	26,718	29,390	32,329	35,562	39,118	43,030
1.15	1.32	1.52	1.75	2.01	2.31	2.66	3.06	3.52	4.05
15,869	15,736	15,325	14,925	14,536	14,157	13,788	13,428	13,078	12,736

10 yrs discounted FCFs = 143,578

Step 3: Calculate the perpetuity value and discount to the present value

Perpetuity value = (43,030 x 1.10) / (0.15 - 0.07) = 591,663
Discounted to PV = 591,663 / 1.15^10 = 146,089

Step 4: Calculate total equity value = 10 yrs FCFs + Perpetuity value

Total equity value = 143,578 + 146,089 = 289,667

Step 5: Calculate per share value = Total Equity Value / Total share outstanding

Share outstanding: 917.31M
Per share value = 289,667 / 917.31 = $315.78

It seems Morningstar's calculation method was much closer to the current stock price, but please take of the main differences here. For both calculation I used discount rate as 15% that was fine, but in old method we estimated next 10 yrs EPS growth rate @ 23.61% per year. Here we only used 10% for next 10 yrs FCF growth rate and then used 7% for perpetuity FCF growth rate.

The basic idea here is the assumption for the growth rate play a very important role to determine the intrinsic value calculation result. The key is we should take into consideration of the size of the company, industrial cyclicality, economic moat, management team, and the complexity of the business to pick a comfortable estimated growth rate - assigning estimated growth rate is an inexact science - there are no "right" answers for any stock analysis.