This week to took me to rainy and a bit cold Ann Arbor, Michigan for a visit to Zingerman’s. Zingerman’s is a food business in the Ann Arbor area that has nine distinct businesses all focused around great food. It all starts with a deli and expanded from there to a 500 plus employee food business. They now have a bakery, coffee house, full service restaurant, creamery, active farm, coffee business, gelato, and candy business. I came to speak to a group of managers from the Zingerman’s group of businesses on one day and a group of local businesses and attendees from the ZingTrain business open book management class on the other day.
I have been friends with the primary owners and founders of Zingerman’s for about 15 years. It’s always fun to visit, the food is always the highlight there. On this trip I had a Ruben sandwich from the deli with red potato salad for lunch the first day, then dinner at the Zingerman’s Roadhouse restaurant for dinner where I had crab cakes, homemade mac and cheese, and a half rack of ribs, then on day two I had a club sandwich on sourdough farm bread with lots of great sides. I’m bringing home some famous Zingerman’s brownies for the family. Yep this place is about food. Not a great place for a weight loss program though.
Oh yes, while I was there I did those two days of financial statements training. As an open book company, many of the managers I trained at Zingerman’s were…an open book. Lots of great questions and discussions. The group was interested in learning more about the balance sheet and statement of cash flow. We used Apple as our sample company, they are a great company to use when learning about cash flow. They have lots of it! We learned that Apple had free cash flow in 2015 of about $70 billion and they sit on over $40 billion cash and securities on its balance sheet. These guys are not going to miss payroll.
The problem with Apple is they have too much cash. With too much cash Apple is not putting a critical asset to use. When a business sits on its cash it is not getting a good enough return on it. Apple has been sitting on large sums of cash for several years. Consequently, their stock trades at well below what would be typical in terms of their P/E ratio. A P/E ratio is the stock price on any given day divided by its last four quarters earnings per share (EPS). A typical public stock trades at a 17 P/E ratio. Apple is currently trading at 11. This means the market does not view Apple as favorably as a typical stock. Even though Apple has high margins, over 30% on its operating income, and lots of free cash flow. It all goes back to the fact that Apple is sitting on too much cash and not reinvesting it. At some point Apple must pay the cash out to investors in the form of dividends or buy back billions of its own stock. Will Apple make that move? Time will tell.
So it was another couple of great days for finance. It was cold and rainy in Michigan while we got a foot of new snow in Utah. While I enjoyed the training and food, that picture my wife sent of her on slope made me just a little jealous. Maybe I can make up for that tomorrow…