Tag Archives: investment performance

Apple(AAPL)’s 1Q13 earnings

January 24, 2013 By in earnings conference calls, Stock ideas, Technology, Wireless Tags: , , , , , , , , , Leave a comment

the report

After the close yesterday AAPL announced its 1Q13 earnings results (the company’s fiscal year ends in October).  AAPL earned $13.81 per share on revenues of $54.5 billion, both all-time records.  Sales were up 18% year on year, EPS were down by $.06.  EPS exceeded the Wall Street consensus by a little.  Revenues were a tiny bit lower.

Note that 1Q13 had 13 weeks in it, 1Q12 had 14.  On an apples to apples basis, sales would have been up by about 25% and eps would have shown a gain of 10%+, I think.

new guidance

AAPL also announced it was changing the way it would give forward-looking earnings guidance–and provided the first figures using the new method.  Under Steve Jobs, the company gave what inevitably proved ludicrously low single-number suggestions about what its sales, margins and EPS for the following quarter would be.  I’m not positive AAPL intended its “guidance” to be funny, but the process ended up being almost a parody of the way most other companies proceed.  My strong impression is that AAPL knew the figures it suggested were wildly inaccurate.

Under Tim Cook, AAPL has decided to become a bit more conventional.  During the conference call the CFO said that 2Q13 revenue will likely be $41 billion – $43 billion.  Gross margin will be between 37.5% and 38.5%, operating expenses $3.8 billion – $3.9 billion.  Other income will be about $350 million and the tax rate will be around 26%.  Unlike the past, no EPS figure was given.

All that would imply EPS of around $10 for 2Q13–a figure substantially below the brokerage house consensus of $11.50.  Of course, until we have actuals to compare with we won’t know whether the new company guidance protocol is intended to be any more accurate than the old.

Nothing on the call thrilled Wall Street.  As I’m writing this in mid-afternoon, AAPL shares are down about 12% in an otherwise flat market.

details

The iPhone is fine.  Units were up 29% yoy (30%+, apples to apples), revenues up 28%.   iPhone 5 was capacity constrained for most of the quarter, iPhone 4 for the entire period.  So sales could have been higher.  Despite this, sales were in line with the growth of the smartphone industry. Remember, too, that smartphones are AAPL’s main business, comprising 60% of revenues and more than 2/3 of operating profit.  So this is the business that counts.

two points of weakness

Macs (10% of sales)

AAPL was capacity constrained with new iMacs.  AAPL’s PC unit volume was down 22% yoy (-15% is probably a better apples to apples number), in a market that declined by 6%, however. So having more iMacs on the shelves would have affected the degree of market underperformance, not the fact.   Higher unit selling prices meant that revenue declined by about 10% ata.

iPads (20% of sales)

Units were up 48% yoy (60% ata). That’s good.   But revenues were up only 22% (30%? ata).  That’s bad.

Yoy the average selling price of iPads in total (minis, iPad 2s and the newest models) dropped from $568 in 1Q12 to $467 during 1Q13.  In other words, during the year AAPL saw a massive move away from its flagship tablet offering toward cheaper models.  My back of the envelope guess is that the company sold around 13 million newest model iPads during the 2011 holiday season   …and only about half as many this time around.

Significance?

A while ago, AAPL decided to move its computer line upmarket.  My guess is that it’s now suffering from a cyclical falloff in demand caused by macroeconomic weakness–and made somewhat worse by the high price points.

The iPad numbers say to me that the tablet market is already quickly evolving away from the original high profit margin format of the original iPad, either toward a $400 price point for corporate/ education use and a $200-$300 price for consumers.  If I’m correct, the tablet market may end up being much bigger than previously thought, but it won’t follow anything like the high profit trajectory of the smartphone.  Note, too, that mini production was capacity constrained during the quarter.  The average unit price might have even been lower if AAPL had been able to satisfy all its potential mini customers.

my take

The tablet numbers are the only disturbing thing I found in the APPL quarterly information.  From what I’ve read, I’m not sure anyone else has noticed, however.  But both in tablets and Macs, AAPL has given the first hints that even it can be subject to business cycle forces.  That’s another way of saying that the company’s peak earnings acceleration phase may be behind it.

From a stock market point of view, however, investors have been discounting the arrival of this day (incorrectly, until now) for a half-decade.  AAPL has $137 billion in cash, about a third of its market capitalization, and no debt.  If we assume the company can earn $50 a share this year, it’s trading a 9x earnings, while growing at a bit less than 15% in weak economic times.  Better economic times should move that growth rate north.  Ex cash, AAPL shares are trading at 6x.  That’s crazy low.

where will the buyers come from?

I’ve read somewhere recently that over 3/4 of all equity mutual funds in the US have AAPL as one of their top few positions.  Equity oriented hedge funds have been up to their ears in the stock for a long time.

Two reasons why:

–it’s been a great stock to own for almost ten years, and

–at its peak, AAPL represented 10% of the IT sector’s market cap and 5% of the S&P 500’s.  Therefore, any professional concerned with outperforming an index would be forced to establish at least a market weighting in the stock in his portfolio, if for no other reason than to protect himself from losing ground to a surging AAPL stock price.

So, who’s left to buy?  No one.

What I’ve just written sounds pretty stupid, but it’s a situation that occurs often in smaller markets where one or two stocks dominate the index.  We just haven’t seen it in the US during my lifetime.

A common strategy in these markets is to neutralize the whales (have a market weighting) and try to achieve outperformance elsewhere. So virtually everyone already owns all the stock he ever intends to own.   The result is that surprisingly small amounts of buying and selling can move the giants a long way.

This may be happening with AAPL.  Certainly, in my opinion, the fundamentals don’t warrant the current low price.  But it’s anyone’s guess how long the current malaise may last.

are political mists clearing in Washington?

January 21, 2013 By in Current Market Thoughts, Shaping a portfolio for 2013, Strategy Tags: , , , , , , Leave a comment

The US securities markets are closed for Martin Luther King Day.  I’m going to make only a brief post–and one not as directly associated with finance as usual.

 

As a growth investor, I’m a big believer in progress through creative destruction.  I think the rate at which such change occurs accelerated during the Cold War period after WWII, and accelerated again when China decided to ditch central planning in favor of Western economics in the late 1970s.

Change isn’t easy.  The forces of the status quo–the current economic and political leaders–in every economy are very powerful.  They oppose change in any way they can, because it’s in their own economic interest to do so.   In the emerging world, crunch time typically comes when the supply of new workers for labor-intensive export-oriented manufacturing  (most often textile) is exhausted.  Wages begin to rise.  Operations become less profitable.

In theory, it’s clear what has to be done for the national good–migrate to higher value-added industries by worker retraining and by shifting government efforts toward creating infrastructure that attracts more sophisticated foreign companies willing to transfer technology.

In practice, the corporate and government beneficiaries of the way things are now use their clout to stop this from happening.   Many times, because they’re rich and powerful, they get their way–to the long-term detriment of the local economy.

In the developed world, the prime example of the dysfunctional triumph of the status quo over progress is Japan.  Once an incredibly dynamic economy, Japan has spent almost the past quarter century protecting the political and industrial establishment of the late 1980s.  The result has been decades without economic growth, an industrial base in shambles, a sharp decline in the Japanese standard of living and the piling up of an immense government debt.   Ugh!

To my mind, the EU has already traveled a significant way down the same path.

The US, although at an earlier stage,  appears to me to be following suit as well.  This despite the increasingly intense dissatisfaction of the electorate, expressed mostly as unhappiness with continuing deficit spending.

Pretty scary stuff.

Very recently, though, Washington appears to be having second thoughts about what it’s dong.  The Republicans are now saying they won’t repeat last year’s fight in Congress over increasing the debt ceiling.  The Democrats are saying they’ll prepare a budget that includes spending cuts.  So we may be seeing some willingness on both sides to give up their rigidly partisan, protect the status quo, positions.

Certainly, it’s very early days.  But what significance would a movement toward common sense and compromise in Washington have for stocks?  The world already knows that the dysfunction story ends in an economic disaster.  This possibility get expressed in investors paying  a lower price earnings multiple for US stocks than they otherwise would.

How much multiple expansion would a less self-destructive Washington engender?  One point?    …two?  Each point would represent about an 8% increase in the market level.  So there’s a lot at stake.

2013–year of the “Great Rotation”?

January 16, 2013 By in "Great Rotation", Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action Tags: , , , , , , , , , Leave a comment

The “Great Rotation” is what journalists have begun the call the idea that investors of all stripes–but particularly retail–are starting to reverse the sharp shift in asset allocation away from stocks and into fixed income that they made as the Great Recession unfolded in 2008.

There’s some evidence that a shift of this kind is beginning.  Recent weeks have shown sharp increases in flows into equity mutual funds, although the main winners have been global/international funds and emerging markets funds–not US-only ones.  At the same time, there have been sharp outflows from developed market bonds funds.  At least some of this money has gone into stocks, although most may have been reallocated into emerging markets bond funds.

I have some reservations, though:

–Yes, the flows have been unusually large.  But until we see more data it’s hard to know whether these are beginning-of-the-year adjustments that will disappear come February, or whether they’re a more enduring trend.

–More important for us as equity investors, it’s not clear that shifts like this are good for stock market performance.  Intuitively, you’d think they should be, but historically they’re not.

Fidelity, for example, released a study more than a decade ago about investor experience in one of its flagship funds.  The results were that the fund itself had made, say, a 100% gain over a ten-year period.  The average investor in the fund, in contrast, had a gain of only, say, 30%.  Why the difference?  People were always selling at low points for fund net asset value (when they were afraid) and buying at high points (when they were feeling good and when the fund had already been showing strong returns for  while).

I’d been working for about a year for a load fund organization trying, unsuccessfully to that point, to improve the performance of a chronically underperforming portfolio (it subsequently did really well, and for a long time).  A very successful broker came up to me at a sales meeting and told me he’d just put a large amount of his clients’ money into my fund.  When I thanked him, he asked me if I wanted to know why he’d done this.  With some trepidation, I said yes.  He told me he looked for competent managers whose portfolios were underperforming and who were generally unloved.  His exit signals?   …a sustained period of outperformance, followed by strong inflows of cash.  The clincher for him was if the organization began a sales campaign touting the fund.

Colleagues at other organizations have told me basically the same thing–they found it’s always time to become defensive if they start seeing large cash inflows.

Look at the past four years.  Despite continual cash outflows from the US market, the S&P has more than doubled from the early 2009 lows.

–a rotation out of bonds, in my view, will only start when interest rates begin to rise–and bond investors begin to experience losses. My guess is that this is a least a year off.  During periods like this in the past, stocks have been flat to up.  Rising interest rates are a negative for stocks, too.  But rates can rise only if the economy is healthy enough to be producing increasing corporate profits, which act as a stabilizing influence on equities.

what’s wrong with AAPL?

January 15, 2013 By in growth vs value, Industry Analysis, Stock ideas, Technology, Wireless Tags: , , , , , , , Leave a comment

AAPL shares have been steadily underperforming the S&P 500 since late September, losing 30% of their value relative to the index over this span.

I think several factors are involved:

1.  potential income tax law changes.

In the recent debate over increasing tax rates, suggestions were circulating that the tax preference on long-term capital gains vs. ordinary income should be eliminated.  That would have raised the Federal tax on long-term gains from 15% to over 40%.  The worry that this would happen was the trigger for taxable AAPL holders with large profits (meaning just about everyone) to realize at least part of their gains in 2012.

I think this was a big reason for downward pressure on AAPL shares during 4Q12.  However, the relative weakness has continued pretty consistently so far in 2013, other than during the first couple of hours of trading in the new year.  So it can’t be the whole reason.

2. a slowdown in iPhone 5 sales?

 Component suppliers to AAPL have been saying for a month or so that the company is deferring orders for iPhone 5 parts.  The latest such announcement comes in the Nikkei newspapers in Japan, usually an extremely reliable source.  AAPL orders to Japanese makers of  iPhone 5 screens for 1Q13 have supposedly been halved to 33 million (I read about it online and in the WSJ and FT).

In itself, this is not such a big deal, in my view.  It’s not clear whether AAPL has excess inventories or whether it’s shifting business to alternate suppliers in, say, Taiwan or mainland China.  And it’s also possible that any slowdown will only last a quarter or two.  I don’t know, but it’s possible.

3.  Who are the new buyers?    

This is one of those odd stock market phenomena.

Individuals and hedge funds caught on to the AAPL  story before many mutual funds.  But the damage to relative performance from not owning AAPL, or from having less than the market weighting became so severe that virtually every mainstream professional has already been forced to build a huge position in the stock.

So who’s left to buy?  Almost no one, in my view.

In fact, early supporters, who have enjoyed outperformance for most of a decade from holding a lot of AAPL must be thinking that the way to distinguish themselves from rivals today is to be underweight the stock.  This can happen in two ways–either by selling shares of AAPL or by just not buying any more as new money comes in.

Maybe this sounds a little crazy to you, but I think this is the main issue the stock is struggling with today.

4.  Is the AAPL growth story “broken”?  

Typically as a growth stock continues to report surprisingly strong earnings, its stock price moves sharply higher.

Two reasons:

–the market adjusts to the higher level of profits and

–the price earnings multiple expands, as investors raise their expectations for future growth.

As earnings begin to disappoint, as they sooner or later must, this process goes into reverse.  The stock price adjusts to lower current earnings and the price earnings multiple, usually sky-high by this time, begins to contract.  Multiple contraction is, in my view, the worse of the two.

AAPL’s case is unusual, however (in fact, it’s the only stock I’ve seen exhibit this behavior).

The company’s earnings are 10x what they were five years ago.  During the entire earnings expansion, however, AAPL’s PE has been contracting.  Yes, an accounting change may have caused part of this.  Still, the stock traded at 30x earnings in 2008 and trades at 12x now!  In other words, a slowdown in growth has been baked into this Wall Street cake for a long time.

I don’t think there’s any expectation in today’s stock price that AAPL will ever produce another spectacular product like the iPod or the iPhone.  As I read it, the current quote expresses doubt that AAPL will be able to defend its market position against competitors like Samsung.  That seems a little harsh to me   ..but I haven’t done careful research to convince myself that this is the case.

 

 

 

 

I’ve just updated Keeping Score for full-year (and December) 2012

January 2, 2013 By in Constructing a Portfolio, Current Market Thoughts, Recent Market Action, Strategy Tags: , , , , , , Leave a comment

I’ve just updated Keeping Score for 2012.  This is the first step in my annual set of strategy posts.  If you’re on the blog, you can click the tab at the top of the page.