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Apple Results & Market Reactions

January 24, 2013 | About:
The Science of Hitting

The Science of Hitting

215 followers
Apple’s (AAPL) earnings are creating quite a buzz. I don’t have much to say about the company’s results or its merit as an investment (as I’ve noted previously, I simply don’t believe that I have a firm enough understanding on how sustainable their business is). However, I want to note a few things (mostly market participant reactions) that I think are worth talking about.

The first is this notion of the “miss” coming from the financial media; my belief is that they really don’t know what they’re talking about when results come across the tape — and when they can’t explain equity movements with EPS (which Apple beat) or revenue (a slight miss) versus the street’s estimates, that leaves them guessing. A great example is the iPhone number that’s being pointed to: The company sold 47.8 million devices, compared to a consensus on the street of 48.3 million. For anybody interested in the math, that’s a miss of about 1% — and according to places like MSN Money, is the rationale for a $40 billion decline in the company’s valuation.

The next thing to address are the questions that are getting louder: what about competition? Where’s the next big product? Is this growth sustainable? As I noted in my article, “As Goes the Stock, So Goes the News,” the financial media is great at keeping their mouth shut when the stock is rushing higher — yet will fling against the wall at any possible explanation for a company’s demise if price movements suggest that it is around the corner. People are notoriously bad at staying level-headed, and it’s laughable with hindsight: A few months ago this stock was assuredly going to be worth $1 trillion in no time — and now they want Tim Cook’s head on stick.

If you own Apple, you MUST be asking yourself questions about the sustainability of the company’s earnings — a measure that has more than quadrupled in three years’ time on its way to more than $40 billion; if you can’t explain why this is sustainable — why this company will be able to hold onto a position that has been subject to wide changes in the recent past — the price/earnings ratio suddenly becomes quite useless. The intelligent investor will become more demanding in their questions as the stock becomes richer — the increase alone is NOT an answer.

Analysts were at a race to the top when Apple was moving higher (with some pointing above $1,000 per share); now, they will likely engage in a race to downgrade. As I’ve noted previously, they are in a game of guessing short term price movements. What the analyst community has to say, at $700 or $450, is of little (if any) importance to someone who thinks like an owner. If you are in the business of predicting quarterly iPad, iPhone, and Mac shipments, you belong right along with the aforementioned analysts (have fun trying to outguess them).

For the long-term investor, the decline in the share price is irrelevant; the answer to the aforementioned questions (and what may be gleaned from this quarter’s results) is the critical component in the equation for determining Apple’s intrinsic value. If you are only starting to ask yourself these questions after the stock’s declined, you are well behind the eight ball.

For me, Apple remains in the “too hard” pile (for now — if we get to a level where I’m paying a low single-digit multiple ex-cash, I would take a much closer look than I have in the past). I would be interested in hearing others’ thoughts on the sustainability of Apple’s business.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.1/5 (21 votes)

Comments

mocheng
Mocheng premium member - 1 year ago
great article. competition is catching up with apple, they needs to either come out with a new innovation, just modifying existing products aren't good enough at this point, as others can match or exceed their device specs.

500 million iOS devices sold, to get to the next 500 million iOS, they can't be doing what they did in the past year, because it's just not good enough anymore.

nvakeel
Nvakeel - 1 year ago
Absolutely Agree with you. on Sept 2012, I read quite a few news from these so called "great Analysts/Experts" whatever you call them, Will Apple be the first Trillion$ Company? Now the quarterly results are here, just 1% miss and now these experts are downgrading the stock to Neutral or Hold and cutting the Price target to $550.

Mark_F
Mark_F premium member - 1 year ago
In the history of the mobile phone business, how many companies with "killer must have" products made it to the top more than once - or were able to hold onto their top position? Witness Nokia, who today stopped paying a dividend 'to give them more time to restructure'. Or Sony, Motorola, Palm...
The Science of Hitting
The Science of Hitting premium member - 1 year ago
Mocheng,

Thanks for that, and agreed - the law of large numbers makes perpetual growth at double digit rates for any period of time quite difficult.

Nvakeel,

Yep, it's amazing how quickly they change their targets; thanks for the comment!

Mark_F,

The answer - as you note - is a couple; I think Apple has a stronger argument than those names had - I just don't know how strong it is. Thanks for the comment!
brodsky
Brodsky - 1 year ago
For past 2 months all i've been hearing from wall street is that apple needs to price their products more aggressively and aim to expand their market share, or, become a boutique brand business - raise prices and fight for margins.

And it's amazing to me that this is all they came up with even though apple is more than just revenue, more than just hardware producer - samsung, and more than just software developer - microsoft(borrowed from analyst reports). Hence, possible options are endless.

portfolio14
Portfolio14 - 1 year ago
This morning, I shuffled AAPL from the my "too hard" (mental) basket into the "getting really interesting" basket. When RIMM was $40, it was too hard. When it went below $9, it was not.

Btw, great writeup.
Patience Investing, Inc.
Patience Investing, Inc. - 1 year ago
Hi The Science of Hitting,

Thanks. As always, a nice article.

If by "sustainability" you mean "durable competitive advantage", the gross profit margin in the last five years (2012-2008) was around 40% except 1 year (2008), which I believe an indicator of competitive advantage. I ignore quarterly performance all together.

Despite strong fundamentals and attractive valuations both from P/E and FCF perspective, I also noticed Apple enjoyed a negative cash conversion cycle (CCC) in the last 15 years (2012-1999), which means Apple is financing their operations by their suppliers. Now in a competitive market, who can command that?

My understanding of the situation is Mr. Market is manic depressed with Apple now. Give him some time, he will be back to his senses.

Thanks.
beammeup
Beammeup premium member - 1 year ago
APPLE shares are on sale folks! Isn't this when "value investors" are supposed to be buying. Take a good long look at Apples numbers, it's financials, do some math. Its a great buy anyway you look at it! Even with loads of "safety margin" it's still a great buy. Its brand power, its hordes of cash, no debt!

And now dividends.

I'm hoping it crashes another 10-20 percent cause I'm buying!
paulwitt
Paulwitt premium member - 1 year ago


I viewed today as "The Great Rotation". I have a watch list and today Netflix was up 42% (p/e 133?) and ESI was up 18% (p/e 1.8?) - both on heavy volume. And AAPL was down 12% on heavy volume.

It looks like cashing out to me (with a little bit of short covering). And add in a dollop of HFT.

*Being a small retail investor I have minus zero interest in propping up a half trillion dollar company along with a bunch of hedge funds. No thanks.

**Pick a stock AIG or AAPL....

Nicolas73
Nicolas73 premium member - 1 year ago
Which company is on the top of the Buffett-Munger screener list right now? ;)
paulwitt
Paulwitt premium member - 1 year ago
At the lower price Apple might be a good ATM machine i.e a good place to park cash (better than money market or treasuries!)

Dividend @ 2.1%. If they increase it that would be wonderful. That gives good stock support also.

IMO

The Science of Hitting
The Science of Hitting premium member - 1 year ago
Thanks for the comments all - some interesting thoughts on AAPL...

mla
Mla - 1 year ago
I have never owned AAPL in the past. I saw the relatively low P/E, but was too worried about Jobs' health, etc.

But at this point, I'm backing up the truck. I starting buying after 25% correction. Increased to 5% of AUM as of today. Over the weekend I'll be figuring out what to sell so I can buy more next week. Looking for at least a 10% position.
jonmonsea
Jonmonsea premium member - 1 year ago
a low single digitmmultiple ex cash? Yes, that would be nice. Why not buy with a high single digit multiple excash. I honestly suspect that people are shying about from apple because of its high nominal share price having fallen, in the same way some may have latched onto a high nominal share price having risen. Smething along the lines of the sunken cost falacy. In any event, at what excash PEG ration would you conside buying AAPL?
The Science of Hitting
The Science of Hitting premium member - 1 year ago
Jonmonsea,

I have no interest in PEG ratios, because they inherently assume that the E in the equation is sustainable (which I'm not positive it is), and the growth rate can be pretty much anything (trailing figures? future forecasts? how many years out? 1? 3? 5? etc.).

A low P/E would suggest the company only needs to sustain earnings at this level for a few years to justify the valuation (also assumes they don't squander the cash at some point - far from a guarantee, as seen by companies like HPQ). Others may feel comfortable that AAPL will sustain/increase earnings for years to come - if you think that's the case, you should be buying now; personally, I'm just not sure.

Thanks for the comment!
ramands123
Ramands123 - 1 year ago


Not sure why no-one is averaging the earnings over a business cycle.If you do that Apple trades at 20 times the earnings.Certainly not cheap enough for value investors.



Patience Investing, Inc.
Patience Investing, Inc. - 1 year ago
@Ramands123

Apple's 10-year (2012-2003) average P/E is 26.92. Current (January 29) P/E is 10.39, less than half of the 10-year average. Based on P/E, assuming a modest earnings growth rate of 15% (which is 1/4th of current earnings growth), I calculated the intrinsic value of $1184 with a 60% margin of safety.
hardcorevalue
Hardcorevalue - 1 year ago
way too many apple bulls relying on last years earnings IMO. Applying a growth rate on today's earnings implies they are 100% sustainable, nobody can honestly say that with a straight face.
ramands123
Ramands123 - 1 year ago
@Patience Investing, Inc.. What market has paid in past is not what it is likely to pay in future for Apple. So average P/E is not a good assumption. I think you would aggree to that.

If you just average out earnings for last 6-7 years ..its roughly around 20 $ per share. So at 450 $ its is slighly above 20 times. With Samsung making better or equal quality products than Apple ( and the best TV's btw) , there are serious downside risks to Apple.. There moat is evoprating by the day. So i don't think risk reward is good enough and it is certainly not a value play at 20 times the earnings.

I have a small long poistion on Apple , so i would love o see Apple play out well but unless they truely innovate i am not bullish on Apple.
Patience Investing, Inc.
Patience Investing, Inc. - 1 year ago
@Ramands123

Yes, I am completely aware of that. Mark Twain once said, "History doesn't repeat itself, but surely it does rhyme". We are talking about a company with so much innovations and performance over the years. I don't think they will fall apart soon.

Thats why, I also looked at the FCF valuation and I ended up with an intrinsic value weigh higher than the current price (with a more than 60% margin of safety). My understanding is that regarding Apple, Mr. Market is manic depressive now and as always he will come to his senses (I don't know when though).

I am buying and only the time will say who is right.

Thanks.

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