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Stock Analyst Update

Apple Remains Fundamentally Undervalued After Tax Hit

The firm has almost $215 billion in international cash on hand, so the record tax bill will make only a small dent in the firm's cash cushion.

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We will maintain our $133 fair value estimate for  Apple (AAPL) for now, even though the company was hit with a EUR 13 billion ($14.5 billion) tax bill by the European Commission, which ruled that Ireland gave illegal tax benefits to Apple. We concede that $3 per share, or just over 2% of our fair value estimate, is at risk with the ruling, but the timing and amount of the final payment remain uncertain. Apple will not take a financial charge for the tax bill in its near-term results, and the fine may be placed in restricted cash but will not be immediately paid out. We expect both Apple and Ireland will appeal the ruling, and a final decision could take years. Apple has almost $215 billion in international cash on hand, so the record tax bill will make only a small dent in the firm's cash cushion. Further, Apple indicated that the ruling will not have an effect on its long-term tax rate, presumably because its Irish tax structure in question was modified in 2015. Regardless, we continue to view Apple as fundamentally undervalued, and the company remains one of our best investment ideas in the tech sector.

In essence, the European Commission considered Apple's tax structure within Ireland, which was in compliance with Irish and international laws, as anticompetitive, as Apple received tax breaks (presumably in exchange for creating jobs in the region) that allowed the company to pay a tax rate as low as 1% in 2003 and 0.005% by 2014 on all revenue from the European Union, not just sales within Ireland. We estimate that Apple earned roughly $71 billion in cumulative operating income in Europe over the time frame in question (2003-14).

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Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.