Tag Archives: AAPL

AAPL’s 2Q12: deja vu all over again

April 25, 2012 By in China, earnings conference calls, emerging markets, Hong Kong, Industry Analysis, Stock ideas, Technology, Wireless Tags: , , , , , , Leave a comment

the results

After the close of New York trading yesterday, AAPL reported results for its second fiscal quarter (the company’s fiscal year ends in October).

It was–contrary to highly publicized negative analyst expectations–another litany of record performances.

Revenue was $39.2 billion, up 58.7% year on year.

Net income was $11.6 billion, up 93.3%.

EPS was $12.30, a 92% yoy gain.  Of 42 analyst estimates for the quarter, the lowest was $8.46, the highest $11.80, the median $9.81.  So, once again, AAPL blew away the consensus.

details

The company sold 35.1 million iPhones during the quarter, up 88%.  This compares with 46% growth in the overall smartphone market.

iPad sales were 11.8 million, a 151% yoy increase.

4 million Macs went out the door, up 7% yoy (in a PC market that was up 2%).

iPod unit volume was 7.7 million units, down by 15%.  The music player–which was once half the company–now represents only 3% of sales, however.

what caught my eye

AAPL continues to be capacity constrained with the new iPad.  The huge tablet sales gain this quarter appears to have been driven by demand–especially from schools–for iPad2, once AAPL dropped the price to $399.  I don’t see any reason to think that this new-found new source of tablet demand will go away any time soon.  And it could turn out to be very big.

Greater China was the geographical star.  Sales in the region, which made up 20% of the AAPL total for the quarter, tripled yoy.  iPhone sales were 5x the year-ago level.

Mac sales barely outpaced the market for the quarter.  But that’s comparing a newly refreshed product line a year ago with the same lineup today–now a little long in the tooth.  So I don’t think the weaker than usual comparison means anything.

Management gave its usual song and dance to “justify” its low-ball earnings estimate for the June quarter–$8.68/ share.  The company did make two reasonable points, though.  It expects to sell a lot of iPads, which carry lower margins than other AAPL products.  Also, 2+ million of the iPhones sold to telephone companies during the period went to replenish store inventories depleted during the holiday season.  This extra demand won’t be present in the current quarter.  Neither is that significant, in my opinion.  Together, they may just mean that yoy gains in 3Q12 won’t be quite as impressive as in 2Q12.

pre-announcement analyst panic

AAPL sold off by about 15% in the days before the earnings release.

I was struck by the number of analysts who rushed to publicly validate the price decline by offering negative assessments (now proven to have been wildly incorrect) of the company’s 2Q12 prospects.  One can only imagine what they were saying in private meetings with institutional clients.  I was also struck by the dearth of AAPL defenders–although it’s possible their comments were edited out.

For instance,:

–one analyst I read predicted Mac sales would be down, year on year, in the quarter–without mentioning either how difficult the comparison was or that Macs only make up a bit more than 10% of AAPL’s business.

–another said in a recent TV interview that he was lowering his forecast of iPhone sales from 33 million to 30 million–and intimated he thought that figure might still be too high.

I have four observations:

1.  I think the analysts in question extrapolated from what they knew about the US and Europe to the rest of the world.  When you think about it, that seems kind of loony.  Why would you think China, which is growing at 7%+ and where people are just starting to buy smartphones, would look like the US?

2.  More generally, the incident says something about the quality of research on Wall Street.  APPL isn’t the only case.  Analysts did the same sort of extrapolation with INTC last year.

3.  It says something admirable about AAPL that they don’t have one standard of information dissemination for ordinary people like you and me, and another one for Wall Street analysts.

4.  This shows how a rumor-driven market works.  Once a story starts, information sources rush to repeat and amplify the rumors, mostly because they’re worried that otherwise they’ll be thought to be out of touch.

AAPL’s stock?  It still looks cheap to me.

 

is anything “wrong” with Apple?

April 17, 2012 By in Constructing a Portfolio, counter-trend movements, Current Market Thoughts, Portfolio management, Stock ideas, Trading Tags: , , , , , Leave a comment

APPL’s extraordinary recent performance

I was talking about the stock with my brother-in-law, a big AAPL booster, a month or so ago.  I’d been fooling around with one-year performance charts, an obvious indication that I somehow had too much time on my hands.  But doing so made me realize that, as I pointed out to my brother-in-law (who probably already knew), APPL had had an extraordinary impact on the S&P 500′s near-term performance.  Over the prior 12 months, AAPL was up around 80%.  Over the same time span, the S&P was up a bit less than 4%.   But AAPL alone was responsible for most of the 4%!!

Some rough arithmetic:  AAPL probably represented 3% of the index at the beginning of the period.  3% up 80% is the same as 80% up 3%, which is also the same as 100% up 2.4%.  In other words, AAPL’s gains represented 2.4 percentage points out of the 4 percentage point advance the index made during that year.  The other 97% of the index chipped in only 1.6 percentage points.  Those stocks were basically flat.

Index dominance by one stock never happens in the US.  In emerging markets, where a single issue can be 10%-15% of the overall market, yes.   ..in the US, no.  Nevertheless, that’s what AAPL did over the past year.

Then it fell by 10%.

more numbers

Let’s take a quick look at how AAPL has performed, even after that fall.  And let’s include some of the “AAPL eco-system” stocks as well, to see how they’ve made out.

one year (through yesterday)

AAPL          +77.2%

INTC           +43.8%

QCOM          +24.7%

NASDAQ index          +8.1%

S&P 500          +3.8%

ARMH          -4.8%

 

six months

AAPL          +37.5%

INTC          +20.9%

QCOM          +20.1%

S&P 500          +11.8%

NASDAQ          +8.1%

ARMH          -1.9%

 

year to date

AAPL          +43.1%

QCOM          +21.1%

INTC          +17.1%

NASDAQ          +14.7%

S&P          +8.9%

ARMH          +0.8%

what I make of this

1.   Even after the drop of the past few days, the overall situation of AAPL outperformance hasn’t changed very much.  What has happened over the past six months, though, is that the rest of the market has begun to revive.  So AAPL’s gains aren’t as dominant as they had been when the rest of the market was drooping.

2.  The performance of “eco-system” stocks has been spotty.

–Qualcomm, whose chips are in virtually every high-end mobile device, has done well.  But its performance over each of the periods above is a pale imitation of AAPL’s.

–ARM Holdings, whose low power chip designs are in just about every mobile device, high-end and low-, has been left behind in the dust.  Of course, it was trading at close to 100x earnings a year ago.

–Intel, the “anti-APPL,’ the “dinosaur” that ARMH was going to put out of its misery, has been second on the one-year list.  Or course, it was trading at 9x earnings a year ago and yielding close to 4%.

3.  A counter-trend movement, where AAPL goes down and the rest of the world catches up a bit, wouldn’t be the least bit unusual after a year+ like APPL has had.

the rumors

Over the past few days, perhaps only in response to the AAPL decline, I’ve seen three worries circulating about the company, namely:

–Phone companies in the US want to reduce iPhone subsidies.  (Who wouldn’t.  The carriers pay AAPL $600 or so for phones that they resell for $200.)  There’s talk that ATT and Verizon want to charge $230 instead.  It’s not clear that the carriers will be successful.  But if they are, higher prices might clip a couple of percentage points off the growth of AAPL’s most important business (half the company’s profits).  But if that means 22% growth instead of 25%, that’s not such a big deal.

–Mac sales may be slowing.  One analyst is reportedly suggesting that AAPL computer sales may have been down year on year in the March quarter.  That wouldn’t be good, either.  But, realistically, Macs are too small to matter that much to AAPL’s business.  And although tere are good industry data for slow-growth markets like the US and the EU, I don’t think there’s any good way to gauge Asian sales.

–iPad sales may be slowing.  This would be a more serious issue, since tablets are 20% of AAPL’s sales–and thought of as the company’s next hot product after smartphones.  I’m not sure what evidence there is, however.

my take

I’m reading the downward AAPL price move over the past week or so as a natural reaction by market participants with short time horizons–taking profits in a stock that has performed so well in both relative an absolute terms.  The really noteworthy thing is that the reaction took this long.

It’s possible that the worries I’ve seen surface in the past couple of days are justified, but my initial reaction is that the declines prompted the rumors–not the other way around. We’ll know for sure when AAPL reports earnings in a couple of weeks.

What impresses me most about AAPL is its valuation.  On consensus estimates, the stock is trading at under 14x fiscal 2012 earnings and yielding around 2.5%.  If those are anywhere near correct, there’s nothing “wrong” with AAPL other than that no stock goes up each and every day.

Current weakness may well be the trigger for AAPL holders to give their position sizes a sanity check.  That alone may prompt further selling as long-time holders give more thought to exactly how much AAPL they hold.

 

AAPL’s dividend: implications

March 20, 2012 By in earnings conference calls, Recent Market Action, Stock ideas Tags: , , , , , , 3 Comments

the AAPL announcement

Yesterday morning, AAPL announced that it will initiate a $2.65/ share quarterly dividend, starting during the July accounting period.  The company says it will also repurchase $10 billion in stock over the coming three fiscal years.  Together, the two moves will absorb $45 billion in domestic cash.

my thoughts:

the stock buyback

The dividend is a more important signal about future earnings.  But the description of the stock buyback also says something important, and admirable, about the company’s management.

Most firms try to describe stock buybacks an altruistic move on their part, as “returning cash to shareholders.”  They argue that dividend payments create a tax liability for recipients while stock buybacks do not, and intimate that this is the main reason for their action.

The tax stuff is true. But the rest is, at best, nonsense.

Companies pay their employees, and particularly their executives, in two ways:  with cash; and with stock options.  The latter gradually transfer ownership of the firm from portfolio investors to employees.  In fact, many companies in the tech world have target percentages for this transfer in mind when they issue stock options.  The main–unspoken–purpose of stock repurchases is to keep the total number of shares outstanding stable, and thereby disguise the change in ownership that is taking place.

APPL is the first company I’ve seen that’s completely honest with shareholders.  AAPL says its share repurchases have “the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.”  The asset transfer effect, by the way, is a miniscule .5% or so per year in AAPL’s case.

the dividend

The initial payment level of $10.60/year implies to me that AAPL management thinks profits will be a lot better than the market now expects.  Here’s why:

Two basic rules about dividends are:

–they’re supposed to be paid out of profits, and

–they should be set at a level that’s easily sustainable, and that can rise.  Very little is worse for a company than having to cut, or eliminate, a dividend.  A prudent firm–and AAPL is one–would have already thought carefully about a pattern of future dividend increases when setting the initial payment amount.

AAPL’s situation

At the end of the December 2011 quarter, AAPL had 932 million shares outstanding.  Let’s say that rises to 940 million by the time it begins paying dividends.  $2.65/quarter x 4 quarters x 940 million shares = $9.96 billion in annual dividend payments.

AAPL will most likely have chosen the current dividend payment based solely on its estimate of  sustainable US earnings.  Why?  Dividend payments from a US corporation have to use US-domiciled cash.   Yes, AAPL has $33 billion in the bank in the US already–enough to pay the current dividend for over three years or supplement a payout that exceeds US-generated funds for far longer than that.  But what would AAPL do after the US cash runs out?  …cut the payout?  No way.  …repatriate funds from abroad, losing 35%  to federal taxes?  Probably not.

Therefore, it’s a reasonable assumption that AAPL considers a recurring $10.60 a share from the US each year as “in the bag.”  If it were me making the decision, I wouldn’t want to set the payout at 100% of US earnings.  I’d like a cushion.  Arguably, the US cash on the balance sheet is enough of a safety margin, but why take the risk?  I’m thinking the payout is being set at more like 75% of US earnings–which also leaves room for a dividend increase next year.

doing some arithmetic

Let’s try to use the $10.60 a year to calculate what AAPL must be thinking about its total earnings.

AAPL presently earns a little more than a third of its revenues in the US.  As Asia increases in importance to the company, the domestic percentage will likely fall. Assume that the US is 30% of the AAPL total for fiscal 2012 and 28% in fiscal 2013, with overall earnings growing, say, by 15%.

Case 1:  low-balling      AAPL has decided to pay out 100% of its current US earnings in dividends.

That would imply AAPL earns $35.33 this fiscal year and $43.50 next.

I think this is would be, in AAPL’s view, for all practical purposes the worst possible case.

Case 2: realistic     AAPL has decided to pay out 75% of its current US earnings.

That would mean $47 in eps for this fiscal year and $58 next.

This compares with the current analyst consensus eps of $43.14 for fiscal 2012 and $48.44 for fiscal 2013.

AAPL insiders more bullish than Wall Street?  I think so

Case 1 yields no useful information, since consensus estimates are already substantially higher.  Case 2, which I think is considerably more probable, would imply that AAPL’s board and management are both noticeably more bullish on company prospects than Wall Street.  AAPL insiders can be as wrong as anyone else.  In this case, however, they have a ton more pertinent information to work with than you and I do.

you may own more AAPL stock than you think

March 15, 2012 By in Dividends, Industry Analysis, Investment firms, Portfolio management Tags: , , , , , , , , Leave a comment

Yesterday’s Wall Street Journal has an article in which it looks at the investment vehicles that hold AAPL shares.  A third of equity mutual funds sold in the US hold AAPL; 20% of hedge funds claim it as one of their top ten long positions (given the sketchy nature of hedge fund disclosure, I wouldn’t bet the farm that this is figure is entirely accurate, though).

what Apple is

Just to be clear,

–Apple is a US-based company.

–It’s incorporated in California, where its headquarters is located.

–Primary trading is on NASDAQ.

–AAPL doesn’t pay a dividend.

–AAPL isn’t just a large-cap stock.  It’s a MEGA-cap stock.

The median market cap for members of the S&P 500, the large-cap index, is a touch under $12 billion.  AAPL, in contrast, has a market cap of close to $550 billion, or 45x the median.  The company has no debt and over $100 billion in cash on its balance sheet.

what funds hold AAPL shares

Despite this description, according to the WSJ the following kinds of funds hold AAPL shares:

–40 funds that focus on dividends in selecting stocks

–50 funds that specialize in small- or mid-cap stocks

–3 Fidelity funds that specialize in Europe

–international funds, including the Ivy International Growth and the Waddell & Reed Advisors International Growth

–the BlackRock High Yield Bond Fund, a $5.9 billion junk bond fund that held $8.3 million in AAPL shares at 12/31/11.

how can these funds do this?

In one sense, it’s crazy.  How can you trust a manager who says he’s going to buy small, fast-growing stocks with market caps below the S&P 500 median for you, after you see his outperformance is coming from a half-trillion dollar stock?  In this regard, the BlackRock High Yield position that the Journal reports is extremely hard for me to understand.  Ignore the fact that it’s a bond fund owning stocks.  The AAPL position size is so small, at 0.14% of assets, that it’s immaterial to fund performance.  There has to be more to that story.  One guess is that the position is much larger today.

In another, narrowly technical, sense–even though the fund name, and presumably its marketing materials, don’t give the slightest hint that this may be going on–fund rules doubtless permit the purchases.

If you read the prospectus carefully, it will surely say something like the fund will achieve its objective (of buying small-cap, or foreign stocks…) by having at least, say, 65% of the fund assets invested in the specified kind of securities.  It will go on to state that the fund reserves the right to invest the rest of the fund in other stuff.  (By the way, the prospectus may also say that for temporary defensive purposes, the fund has the right to redeploy its assets entirely to cash or to Treasury bonds, or some other presumably safer form.)

why do they do this?

I think the obvious answer is the correct one.  The portfolios in question want to achieve a performance advantage, either over the other funds in the same category or against their benchmark index, by buying securities that are outside their normal investment universe.

Is this illegal?  No, because of the prospectus disclosure.

Is it unethical?  In my view, yes.  An international manager might try to argue that because APPL manufactures and sell products abroad, it’s actually a foreign stock.  Someone might buy that explanation.  It certainly wouldn’t fly in the institutional pension management world, however.  And small-cap managers, who typically charge higher fees to compensate for the extra work involved in small-cap, don’t have an ethical leg to stand on.

what to do

Figure out how much AAPL you actually own and ask yourself if you’re comfortable.

Remember that any S&P 500 index vehicle you hold is about 4.5% AAPL.  AAPL may also be 20+% of any tech fund you own.  And, as the WSJ article suggests to me, it might be wise to take a quick look at all your mutual funds or ETFs to see how much AAPL is in them.  You can get the information from the management company website, the SEC Edgar site, or to the latest report you’ve gotten from the fund itself.

Apple, book publishers and the Justice Department

March 9, 2012 By in e-readers, Industry Analysis, internet, Publishing, Stock ideas Tags: , , , , , , Leave a comment

the investigation

Media reports yesterday indicate the US Justice Department is investigating five of the top six book publishing firms (Random House is the exception) and Apple for price-fixing in the e-book market.  Settlement talks aimed at avoiding litigation are apparently going on, at least with some of the publishers.  A parallel investigation by EU regulators seems to be happening, as well.

what’s at issue

It’s all about trade books.  Publishers have traditionally wholesaled physical bestsellers to bookstores at 50% of the suggested retail price.  The store owners then figured out how much to mark them up–or whether to sell them as loss leaders.  A hardcover with a retail price marked on it of $25, for example, would be sold to a bookstore for $12.50.  The store might retail it for, say, $16–or for $10, if they so desired.  Stores could return unsold copies for a refund.

As little as two years ago, publishers were following the same procedure in the nascent e-book market.

This created a potential problem, however.

AMZN was aiming to become the dominant seller of e-books, to be read on its proprietary Kindle device.  It was taking every e-book it paid a publisher $12.50 for and retailing it for $9 or $10.  Yes, the company lost around $3 a book.  But short-term profits have never been an AMZN concern.  And the company was shifting avid readers in droves from being physical book buyers to becoming Kindle aficionados.

Publishers began to hear the giant Perot-ish (Perotian?) sucking sound of their physical book distribution network disappearing into cyberspace.  How to respond?

AAPL, which was just about to launch the first iPad, came along with a proposal.  Publishers shouldn’t necessarily wholesale e-books to e-retailers.  Instead, they should (technically, anyway) remain owners of the e-books (with no physical inventory, what difference would it make?) and hire companies like AAPL as commission-earning agents to put buyer and seller together…kind of like the way real estate agents sell houses.  That way, publishers could set retail selling prices themselves. This wasn’t an entirely new idea.  Publishers already had similar deals with some small independent bookstores.

AAPL proposed to charge a fee of 30% of the proceeds for each sale.  And, oh…by the way…publishers would also agree not to allow their e-books to be sold anywhere else at a lower price.

Publishers said okay and then broke the news to AMZN.  No more selling e-books at a loss.  E-books had to be priced at the publisher-determined price of around $13-$14; AMZN had to take 30% of the proceeds.

AMZN said no.  The five publishers now being investigated immediately responded by revoking AMZN’s permission to sell their e-books.  AMZN took the books off its website.  But a few days later, AMZN caved and agreed to the publishers’ terms.

consequences

Saying what might have been is a little like writing an alternate history, which is rightly classified as a branch of science fiction.  Nevertheless, here’s my take on the effects of APPL/publisher deal:

–imposing what amounts to the agency model on AMZN broke the company’s momentum in the e-book business and slowed the growth of the medium.

–this gave the publishers time to try to figure out how to support the physical book distribution network.  I don’t know what good that’s done.  It certainly didn’t save Borders

–it caused AMZN to refocus its competition strategy on the price/quality of the reader

–it gave BKS time to perfect the Nook and allow it to emerge as a viable competitor to the Kindle

–it gave APPL another selling point for the iPad, although the device seems to me to be much better for magazines, scholarly journals and textbooks than for regular trade fiction/non-fiction.

what would a settlement mean?

I’m assuming that the main result of any settlement would be to allow AMZN to set the retail price of e-books wherever it wants.

Under today’s rules, a newly-released bestseller in e-book form sells for about $14.  Sale proceeds are split, with $9.80 going to the publisher and $4.20 to the retailer/agent. AMZN might reduce its e-book bestseller price to $9.99.  I think that’s an easy decision.  That was its desired price point two years ago–and one which, at least at that time, proved to be a powerful psychological motivator for customers to choose an e-book over a physical one.  Unlike the situation in 2010, AMZN could pay the publisher $9.80 and have $.19 left over.

What about $7.99?  That would put AMZN back into roughly the same the loss-leader position it had adopted a few years ago.  To my mind, this would be a vintage AMZN move.  But is it necessary?  Given the much larger size of the e-book market today relative to the physical book market, are the losses this strategy would produce manageable?

Maybe a smaller form factor iPad would make AAPL a bigger player in the bestseller book business, but as things stand now AAPL doesn’t need trade e-books to spur iPad sales.

What about Barnes and Noble (BKS)?  The company seems to me to be the obvious loser if AMZN is able to lower e-book prices.  That would accelerate the demise of the BKS bricks and mortar bookstores.  Having a competitor sell e-books at cost would also appear to diminish the chances of the Nook ever becoming a profit-making device.

On the other hand, the AMZN move would likely increase pressure on BKS to sell its Nook name and technology.  GOOG has been rumored as a possible buyer, which, I presume, is the reason BKS has a market cap north of $750 million–and has been rising since the price-fixing investigation was leaked to the press.

The real question, of course, is the price someone like GOOG would be willing to pay.  I have no clue.  I also don’t have any confidence that I’d be able to come up with a meaningful estimate.  That’s okay with me, though.  As an equity investor, you’re in this position a lot. It just means I won’t get involved with the stock.

 

 

 

 

 

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