Apple (AAPL) Makes This Look Easy

Apple (AAPL) reported earnings for the fourth quarter last week and the stock has appreciated 17% since. The market was nervous about what Apple would report as the stock sold off to $91 the day earnings were to be reported, but investors got what they should have expected based on the past: great performance with a safe, conservative forecast for the future. Jobs and company earned $1.26 per share a 26% rise over last year, which outpaced analysts’ consensus estimates of $1.11. Apple announced tremendous sales results for the iPhone with 6.89 million units sold in the quarter (already surpassing its goal of 10 million iPhones sold by year’s end). The iPhone also outsold Research in Motion’s (RIMM) Blackberry phone. Apple became the 3rd largest phone maker by revenue in the quarter behind Nokia (NOK) and Samsung, not bad for a company that has only been selling phones for five quarters now.

Apple is one of the most closely followed stocks on the planet so none of the earnings results are a surprise to an avid Apple watcher. However, there were a couple of surprises in their earnings release that some people may have missed. As Ken Cheng points out in his excellent article:

“For the most part, as we all know, Apple is deliberately vague and conservative when talking about their financials, so revealing this info {iPhone sales breakdown}, is rather extraordinary. Analysts and pundits have constantly criticized Apple for poor corporate governance by not breaking out their revenue streams more clearly. For example, can anyone tell me how many Mac Pros Apple sells? No, they don’t break it out. No one knows and Apple won’t tell. Then why so much info on iPhone deferred sales and income? I mean, over the next seven quarters, Apple will recognize all of those deferred sales, won’t it? Yes. It’s there. Sitting in the bank, collecting interest, and just waiting to be counted by GAAP rules.”

This change of policy demonstrates that Steve Jobs is clearly not pleased with where the stock is presently. He must be thinking, “What must I do? My company is ringing the registers at our packed Apple Stores, we have loads of cash, and great products that consumers seek above all competitors. Yet year to date the stock is down 46%, more than the major indices!” It is clear that he felt there was a lack of understanding about his business and so he gave a more detailed breakdown of revenues, earnings, and accounting that ever before…not to mention that he even chose to be on the conference call. As good as the reported results were on their own, the growth looks even better when you factor in the iPhone deferred revenue streams. Were those sales and earnings recorded in this quarter the revenue results would have been 48% better and improved earnings by a shocking 115%!

Apple Chart

We already wrote of the phenomenon of the Blogging Joes beating the Wall Street pros when it comes to Apple analysis (Blogging for Apples). It seems Andy Zaky and company are the ones who really understand what Apple has in store. I think that these results may silence many of the pundits who thought that a slow down in consumer spending was going to hurt sales of Apple’s premium products. Sure, it must have an effect to some degree, but no tech stock or any other company for that matter can post these kinds of sales. Macbooks are grabbing more market share as sales rose 21%, iPod sales—partially cannibalized by iPhones—still increased by 8%. Not to mention Apple is still coming out with new and improved products like its new line of “unibody” aluminum frame Macbooks with improved graphics chip set provided by NVIDIA (NVDA). Will the momentum slow? Almost certainly, but by all accounts it’s not slowing yet.

When we rate a stock based on fundamentals there are two inputs that are paramount: sales and cash. Sales we have already discussed: they are amazing and seem to only get better with each quarter. It is a well known fact that Apple has $25 billion in cash on hand and no long term debt to speak of. This cash on hand allows Apple to be nimble in this environment by not having to worry about obtaining credit. Do not be surprised to see Apple use that cash to buy out a competitor or maybe a supplier (NVDA?). Or the rumor has started to fly today of a substantial stock buyback program. Furthermore, the company is showing strong earnings momentum, and when compared to historical norms the stock is very cheap. Apple’s price-to-cash flow has traditionally ranged 19.5x and 39.6x, but it is currently trading for only 14.3 times cash flow.

So, the question now becomes, not whether AAPL is undervalued (almost all stocks are fundamentally undervalued right now), but is the market starting to recognize that fact? Perhaps the market is starting to better understand Apple’s worth, but Apple is still cheap in the low $100’s by our valuation methodology. For a long term investor looking to take advantage of a stock that continues to grow but has been beaten down lately, you could do far worse than Apple. Consider Job’s own words,

“We may get buffeted around by the waves a little bit, but we’ll be fine and stronger than ever when the waters are calm in the future.”

We at Ockham Research have wanted to point out Apple’s compelling valuation for a few weeks, but we thought it better to wait for the opportunity to announce our new iPhone app simultaneously. As of Tuesday evening our app is available on iTunes under the name StockRazor. For more information on the first fundamental research available on the iPhone click here.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

2 Comments on Apple (AAPL) Makes This Look Easy

  1. Thanks for reading my lil Opinion piece at MacDailyNews. I’ll be sure to check out your StockRazor app at iTunes!


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