Apple Earnings – a value stock?

Posted on: by .

A couple of solid earnings in some over-weight stocks have the pre-market futures up strongly, especially in the tech heavy NDX index. Amazingly, it only takes a couple of big names to drive the whole market. Was this strong earnings move on better bottom line, top-line revenue, and strong domestic or emerging market growth? All those questions are certainly important and we must determine if this is specific to a sector or if it applies to the market as a whole.

Apple earnings, a value stock?

Courtesy of wikipedia

If you have been following this Market Preview at  any length, you know I have a very strong view of Apple. Personally, I have always had a fondness for the company and my first REAL computer was an Apple ][ and I also had the opportunity to meet the Woz (Steve Job’s partner that created the company). There is no doubt that Jobs, after coming back to the company, turned it into a massive technology, innovative company. No longer was it just home computers, the iPod, iTunes, iPhone, and iPad turned this once failing computer company (it once got a bailout from Microsoft) into the world’s technology juggernaut. After Jobs passed away, many questions have been brought to bear. The stock has struggled, loosing almost 50% of its value before it stabilized.

The new CEO, Tim Cook, had massive shoes to fill and many have been critical of him. One could argue he has made some rather large missteps. He has managed the revenue and growth fairly well, but he is also living in the shadow of not only Jobs, but their existing pipeline as well. Since Jobs’ passing there has been no innovation or new products coming out of the company and people are starting to wonder if there is anything REAL in the pipeline.

The company has so far been rehashing new generations of existing product lines and have also seen significant market competition. Apple once dominated the smart-phone and tablet market, which has changed as Android and Samsung have now taken the crown. So what’s in Apple’s future? Will it be a well-run company that just issues out the next generation of existing product lines or will it once again return to a company known for  innovation? This is a VERY important question, primarily because the growth of Apple revenue, and thus stock price, has been solely based on creating NEW vertical product lines. A close look at the revenue streams show that it is a release of a revolutionary new product that sees massive growth becomes the dominant revenue stream and then fades off into what looks like commodity pricing, until the next revolutionary product comes out. Without these new vertical product lines, the company moves from growth to a value based company, in which it relies on replacement revenue of existing product lines.

My criticism aside, the company has three massive advantages going for it. As well as keeping Tim Cook in good graces,  they also buy some time for Apple.

First: FAN BOY! Apple has a massive Fan-boy, Cult-like following who will always buy the latest generation of their products, regardless of whether there is better technology available from a competitor. They are married to the brand, for better or worse. That is a very powerful advantage in securing solid revenue.

courtesy of tom’s hardware

Second: CHINA! After several failed and weak attempts to make serious in-roads to China and the emerging markets, Apple is finally there. They continue to face stiff competition in Apple Copy-Cat products, but China seems to be on board with supporting Apple and cracking down on fakes. If Apple can get the Chinese and the rest of the emerging markets to drink their Kool-Aid, they could have a billion more Fan-boys that will buy anything Apple.

courtesy of computernewsonline

Third: MONEY! They have over $100 billion in cash. That gives them massive leverage, not just share-buy backs that will boost the price and boost “perceived” earnings. Iit also gives them the ability to buy-out competition and, if they are willing to step back to the times of Jobs’ Risk-Taking, create radical new products.

courtesy of the

Tim, pee or get off the pot!

Apple has also been under pressure from activist investor Carl Icahn, who has been critical of all the cash, is demanding a share-buy back, dividends, or just for them to do something, period. To some extent Carl is right, Tim Cook needs to pee or get off the pot – perhaps a little fire under his ass by Icahn has helped. What Carl is actually saying with his demands is very clear, “Are you a growth company with innovative new products? If so – start spending money and take some risk to develop them and roll them out. OR are you a Value company that will manage their existing product lines and focus on productivity and margins? If so – split the stock, raise the dividend, and spend some of that money buying shares back!”

Courtesy of bidnessetc

The company also announced a 7:1 stock split (effective June 2nd), increased their share-buyback to $90 billion and declared a $3.29 per common share dividend, which is an increase of 8% (is that before or after the stock split?) Looks like Tim Cook is caving into activist investor Carl’s demands, because Carl is getting everything he asked for. Is Tim Cook telling the world, by taking this action, that APple is now a value company and the heady days of growth, risk taking, and radical innovation are over? It seems so, or perhaps Tim Cook is just a puss, because I don’t think Jobs would have caved in to Icahn’s demands. I can’t help but wonder, if they didn’t split, raise the dividend, and buy-back shares – would this stock even be up that much?

Earnings and the numbers

The company reported earnings after the close and they were surprisingly strong, on the top and bottom. Revenue came in at $45.6 billion up from $43.6 billion a year ago. Over-all, the top line was very strong and guess what, it’s all about strong emerging market growth.

Let’s take a close look at the numbers and I want to point out a very important trend:

Revenue: $45.6 billion (up 7%)
Profits: $10.2 billion
Earnings per share: $11.62
Gross Margin: 39%
iPhones: 43.7m units (+ 17%)
iPads: 16.3m units (-16%)
Macs: 4.1m units (+5%)
iPods: 2.7m units (-51%)

If you look at Apple’s history, or any other company’s history with releasing new product lines, it is the NEW vertical market the product line creates that is the core driver of top-line revenue growth. Their first new product, the iPod, at one time was their fastest growing market. Eventually, it was more than 50% of the revenue for the company and sold 10′s of millions of units per quarter. Eventually, you hit maximum market penetration and face competition, that is when you start seeing rapid declines in growth, which eventually comes down drastically. At that point the product’s growth forecast become more reliant on replacement units and new generations attractive enough to get consumers to upgrade. iPod sales have been declining for some time now and it is no longer the core revenue driver for the company. What came next were the iPhone and then iPads. Eventually, they too will see a decline from accelerated penetration growth to a more normal level which looks more like a commodity growth rate.

A value company?

Apple’s decade of success came from creating NEW innovative products that quickly became the NEW core revenue line, while the other seasoned products become lower growth revenue streams. The point is – Apple certainly has some growth opportunities in the emerging markets, but unless they come out with a new innovative product line, the heady growth we have seen over the last decade will eventually slow and become something more along the lines of what you see with traditional value companies.

No doubt the quarter was strong and better-than-expected, but to maintain a strong pace Apple needs to continue to penetrate into the emerging markets as the Western market growth consumption rate is slowing. Additionally, to see longer-term,  heady growth they need to release an innovative product that can replace declines of growth in existing product lines like iPods and iPads, and soon iPhones. The stock is up over 8% in the pre-market at $560 per share. The old highs in December of 2013 were in the $575 range. While the earnings are good, I suspect we could see some resistance up in this range. I wouldn’t buy Apple after the opening.

Other Earnings:

Apple wasn’t the only big name to post earnings; a couple of others we need to look at will also give us a good review of top-line growth and where any growth is coming from.

courtesy of wikipedia

3M (MMM) posted earnings that didn’t beat expectations and the stock is down in the pre-market. However, top-line revenue did increase 3% to $7.83 billion. Growth remains strong in Latin America, China, and the emerging markets, while Western growth slowed considerably. The company stated that it expects to see revenue from China triple over the next couple of years.

courtesy of wikipedia

UPS, the world’s biggest courier company, reported a 12% decline in profits related to the weather in the US. However, international volume growth was up 7.9%, again emerging markets and China continues to dominate growth for UPS. The stock is down slightly in the pre-market.

courtesy of wikipedia

Caterpillar (CAT), one of my favorite companies, reported a slight increase in top-line revenue to $13.24 billion. The company focused on increasing productivity and cutting costs, which boost bottom line profits by 5% (beating expectations). The company stated that sales and top-line revenue will remain modest, mainly because of a decline in sales from their mining unit as well as tepid growth in the US. The stock is up over 2% in the pre-market on better than expected profits.

Watch the close!

The pre-market futures are up strongly and much of that is from the hype around Apple’s earnings. However, I think this market could move into the red by the close. Looking at the other earnings, the story remains a weak domestic market, cost cutting, and relying on China and the emerging markets to carry the water. Additionally, I believe we have been watching a value rotation in the market the last couple of weeks.

Support & Resistance

INDU 16,400 – 16,600
Apple had solid earnings, but I am not sure if that can push this index by itself over the top. I think we are still in a solid resistance zone in here and I would be careful getting long above 16,400.

NDX 3400 – 3600
If Apple can’t drag this index over the 3600 level solidly, I don’t know what will. Expect to see some resistance at 3600. If we can close solidly above it, perhaps we can go higher, but I am betting on solid resistance in here – even with Apple’s earnings.

SPX 1840 – 1880
The beginning of resistance is 1880 and you will see selling pressure from 1880 – 1900, so it will be a slow battle higher if we can close above 1880. The VIX remains in that no-man’s land, not reflecting bullish or bearish – it just doesn’t know HOW to price this market.

RUT 1100 – 1160
The RUT looked weak yesterday and I suspect we could head back down to 1100 before we see 1200 again. We are seeing a move into value and out of growth.

David Einhorn stated he was concerned about a tech-type bubble as we are seeing some nose bleed level P/E ratios in some of these companies. He is pretty much alone in his call as many others continue to talk up the tech sector. I tend to concur with Einhorn and also believe we are seeing some rotation into value as a safe haven play.

Today is one of the biggest days in earnings and if Apple and the other big names can’t get this market to go higher, I don’t know what will. Perhaps the Fed will come out and announce they will stop tapering or even ramp-up money printing.

This is still a Fed reliant bull market; I just don’t see the earnings strong enough to justify another 15-20% run higher from here.

One Response to “Apple Earnings – a value stock?”

  1. McRocket says:

    ‘This is still a Fed reliant bull market; I just don’t see the earnings strong enough to justify another 15-20% run higher from here.’

    I agree, but one thing I now feel is that more and more people are becoming completely dependent on this bubble to keep growing. That means they are not going t give up on it until they LITERALLY have no choice.
    And as long as the Fedis willing to spend…why would this end until it LITERALLY has to fall. And by that I mean that NOTHING the Fed can do can stop it (raise QE, buy stocks directly, nothing).
    And I fear that is at least 2 years more…maybe many more then that.

    The West and Japan is all in on this debt roller coaster…and I do not believe the ride will no until the car flies completely off of the rail.

    What I am saying is that I think this bull market has a LONG way to go…and I hate it.

    Thanks for this preview.