Wednesday, April 25, 2012

Apple's Results Don't Disappoint!

Apple's stock had undergone a precepitous slide over the past couple of weeks. In most trading sessions, Apple's valuation had fallen by several billion dollars, ending  well off its $640 high early yesterday. On April 24 the stock had dipped to $555. As I put the finishing touches to this article for publication, the stock has risen over $50 per share since announcing second quarter results!

This drop of over 13% from the all time high which was attained just a few short weeks ago, was "explained" by various pundits from technical, fundamental, and technologic vantages. Depending on what theories you subscribe to, you could find reason to concur with one (or more) of the arguments presented.

My world lies at the nexus of these camps. I believe that one can look at technical stock charts and learn from classic volume and price patterns. Often the past truly does repeat itself on a stock chart as in life.  However, divining these trends by looking to the past is often  challenging, were it easy, everyone would "do it" and we may in fact (then should) stop repeating our mistakes changing the course  (and value) of  looking at the past..... Very circular logic I know.....




I also look at a company's fundamentals. As an investor, perspective client, or consumer, how a company's numbers look should be "red letter" information. Classic determinants of a company's financial health-- price earnings ratios; price/sales; dividend yield; and many more metrics, offer meaningful insight into a company and its relative relationship to its peer group and the market at large. Sadly, myself and others, find this form of analysis increasingly opaque. As an admittedly aging MBA, I feel I should be able to dissect a balance sheet's essentials with relative ease. Often, this is not the case. Not because the fundamentals of calculating classic ratios have changed (in fact public databases and computers in general have made the act of finding these values and ranking them trivial in many cases). The issue is with the shennangins of accountants and top level executives who "sign off" on dubious,  to put it kindly, trickery. If you happened to watch this week's 60 Minutes episode on the Lehman Brothers collapse, you got a first hand report on how purposeful the deception can be and how utterly worthless the "watchdog agencies" you pay for through your taxes are in "protecting you" from such misleading accounting. It is, or should be, criminal. The auditors are as incompetent as the SEC and other federal agencies tasked with the challenge of ensuring transparency of accounting and information with publicly traded companies. (In Lehman's case, the SEC actually was co-sharing office space and overseeing on a constant basis the year prior to the firm's collapse which shook the world's economic system. Wow.) 

Add the comic missteps of the SEC to discover and stop Bernie Madoff and his ilk from preying on "the sheep" which is detailed with clarity in the well written book, No One Would Listen by Harry Markopolos, and you will better understand why I no longer feel viewing a company's fundamentals is a fair window into an organization's health for the average, or even sophisticated, individual investor. 

The third area I rely upon is technology itself. Even if the company isn't strictly  technology focused, how an organization embraces, uses, and adapts in today's world speaks volumes. P&G, a "stodgy" seller of consumer staples is a fierce competitor. Over twenty years ago, I worked with members of this company using then cutting edge technology tools to determine where best to position Tide, Bounce, Oil of Olay, and many other goods on store shelves to maximize profitabillity and sales for both our firms. We changed logistics too-- how many bags of dog food should wrap on a pallet. And pricing... By experimenting with store groups we found out how much elasticity a product has; how price sensitive are you to a decrement or increment of X% with a given product?  Then and now, P&G is a highly sophisticated user of technology. In a business of pennies, this devotion to maximizing the tools of today can pay big dividends. 

Two axioms always work for me, "Always follow the money" and "Smart tech companies trump dumb ones every time!" I can thank my grandfather (and father) for making me faithfully adhere to the former, I thank myself for coining the latter.

Back to Apple...... On a technical basis, the recent pullback looked like a classic technical retrenchment. After a truly meteoric rise over the past twelve months (see nearby chart), a correction appeared inevitable. Couple this with the general malaise of the market over the past several weeks and the need for market makers and regular investors to take what few profitable chips are available off the table they can, and Apple was a prime target for profit taking based on the "law of diminishing victories" alone (my own turn of phrase). Now that Apple is a dividend producing giant it has been green lighted for money managers whose funds were constrained to trade only dividend yielding equities and they above all seek positive quarterly results!

I don't pretend to understand Apple's total balance sheet. Few people can make this claim. I also don't believe Apple obfiscates anything even if its corporate mantra isn't "Do No Evil."  However, a company now with more than 50% of its sales and profits outside of the US and tentacles in every corner of the world, creates even perfectly genuious accounting which is dense and indecephrable for most. By the way, for the uninitiated, Apple is also the most highly valued corporation in the world as of this writing.... Published second quarter results show the company earning just short of 1 BILLION dollars per week over the past three months!

Which leads me to what I do understand, technology and momentum. Apple has both. The iOS platform has an overwhelming preponderance of developers. There are myriad reasons for this fact, and it is indisputable. Look at the number of iPhone/iPad Apps compared to Android (and other competitors). iOS provides a more unified hardware and software platform The combination of custom designed processors and operating system simply provides a more seamless, smoother, experience to play Angry Birds (and everything else).  The fact that Apple has virtually created a world built around Apps, and there remains a significant portion of the world's population still anxiously awaiting a chance to participate in this brave new universe, makes Apple's upside a "no brainer" in my mind. There are other reasons, but you will have to read on.....

Steve Jobs began a vision. The iPhone seamlessly builds into the iPad. iPhone Apps, while not always perfect, work passably, sometimes well, within the iPad uVerse. iPods, the progenitor of this brave new world, have been largely subsumed by iPhones and iPads.com . Apple hasn't missed a beat. Remember the Sony Walkman? Where did they fall off the technology train? Talk about a company which owned, and lost, a market! A tale of two visions.... Where is your music today..... If you don't have at least one foot in Apple's ecosystem, you are in the minority. Not a trivial thought...

So.... Back to today's news. I watched a compelling stock lose value for a couple of weeks. Stock techies call this a retrace, others a correction. I know that iPad 3 sales are over the top, not because I bought one, but because I had to FIGHT to buy one on the day of the announcement. Apple's web site literally melted down because of the buying activity in its online store. I knew that Apple had a winner. Today's results confirm my suspicions and reinforce the iPhone's international appeal. After years of bemoaning my lack of investment resolve,  I have followed this company literally from the beginning to the trough, where the stock sold at $29 a share, I wanted to own this company and never did. While "on hold" for the new iPad, I flipped to my broker's web site and finally bought a few shares using simple logic. "If it takes me hours to get through the company web site to buy their newest and greatest toy, someone else must be waiting in an electronically frustrating line behind me."  Today's market numbers prove my point categorially.....


Seems simple, and really is. Add to the mix the massive universe of would be consumers outside the current market penetration of Apple's  sphere of Fanboys and growth seems a given. Some financial pundits make compelling arguments for Apple's valuation to rise to over $1,000 per share in the forseeable future (within twelve months).  Second quarter results seen to confirm a return of Apple's trajectory towards this landmark price point . Sadly in some ways, Apple's numbers acknowledge the US is a diminishing player in the Apple  portfolio (more than halve of the company's revenue came from outside the USA last quarter). As an investor, I see this as least a mid-term positive. The world truly is an onion and Apple is truly primed to peal the layers. Hooray for investors!

Forget the cash hoard.... it is hard to do. Ostensibly, A 1.5% dividend payback against a $100 billion plus of on hand cash seems tough to justify unless you understand Apple won't buy a company like Instagram for a Billion bucks on Tim's wishes. Apple's new iPhoto isn't Instagram, but it may eventually be better. Apple is very strategic and conservative in its acquisitions. I am more comfortable with this approach than having a CEO with a thirst to spend  in a manner which makes one reminisce about the last Internet financial bubble. More importantly, if Apple learns from Microsoft's missteps, they can grow from within and without, for at least awhile.I think they have at least a few more "surprises" in the offing. My crystal ball, Apple at a $1,000 a share by mid 2013.....  

Apple is going to divest $35 Billion to shareholders (about 30% of their on cash holdings!). Apple is trading cheap relative to the S&P 500 on a price/earnings basis. Even after the last twenty-four hour ascension to $611 per share, the company has a P/E of 14.87 versus 15.98 for the 500 stock index.....

I am the first to contemplate who is captaining the ship after Steve's death. Cook is not Jobs and shall never be.  I have reservations about the company's long term roadmap. Today, Apple has a clear direction, one that will continue to innovate and drive its competitors forward over the next three to five years (and possiby beyond). Consumers worldwide will be the real winners. If you are a diehard Steve Jobs afficiendo, one can argue he left a blueprint extending five years into the future.

I do worry that patent litigation dilutes Apple, Google, and others from the real business of  innovation. This is a broken piece of the technology landscape which requires a macro solution. However, this issue impacts all companies, not just Apple....

I could delve far more deeply into any number of points of this article. If you have an interest in reading further, or a desire to explore an aspect of this artice in more detail, please let me know by commenting. Should you wish to comment directly, please email me. 

What are your thoughts? I believe Apple is justiviably the most lucrative  and profitable company in the world. what are your thoughts?


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Companies:   Apple  


I have a long position in $AAPL but have no plans to initiate changes in position over the next 72 hours.


This commentary is not meant as an endorsement of any company or to provide financial advice.  If the author has any financial interest in any company mentioned at the time of this article’s posting, it will be explicitly noted. I welcome feedback and comments. 








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