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Apple Is Rebuilding Its Image, While Value Remains Intact

May 13, 2013 | About:
Apple (AAPL) was the darling of Wall Street for a majority of last year. However, things changed towards the end of the year, and it has been worse this year up to around April 19. In 2012, the iPhone maker attracted nothing short of bullish recommendations from analysts and media pundits, with some predicting the company could trade at $1000 within 12 months. That prediction has so far proved to be a pipe dream, as analysts now value the company's stock at roughly $500. It is a common factor that when a stock is doing well, analysts are bound to blow the roof with ridiculous valuations, which in some cases ruins the performance of the stock.

In fact, besides the obvious issues with Apple's declining margins,over-expectation has played its role in crumbling the stock to its knees. This also explains why the company's management has resulted to issuing a prudent guidance on sales and earnings. You may call it under-promising to over-deliver, but based on the increasing competition in the company's device sales business, that kind of guidance could be the only one that stands a chance to boosting the company's stock performance. Nonetheless, the guidance has been reasonable thus far, not drifting too far from the actual revenue.

Apple Outperforms Revenue Guidance for the Second Quarter

On its fiscal first quarter earnings results on Jan. 23, Apple issued a guidance of between $41 and $43 billion in revenues for the second quarter, compared to analyst estimates of $45 billion. On April 23, Apple reported revenues of $43.6 billion for the second quarter, beating its upper limit guidance by $600 million. However, it came short of the consensus estimates of $45 billion. Apple has gone ahead to issue a guidance below analyst estimates of $33.5 to $35.5 billion in revenue for its fiscal third quarter; analysts expect $38.2 billion. Following the announcement of the results, Apple rallied from a 52-week low of $385.10 reported on April 19, to $456.77 on May 9.

The $17 Billion Bonds Issue Is a Fulcrum in an Uphill Task

Apple now has $145 billion in cash, which remains intact with a majority of it stashed in foreign lands. The iPhone maker had the option of using its own cash in a share repurchase program, expected to return $100 billion to shareholders by the end of 2015. Apple will achieve this goal by partly paying an improved quarterly dividend of $3.05 per share, and repurchasing of shares worth $55 billion. Therefore, the investors seem to be getting what they have always wanted. All investors put money in a company seeking to receive something in return.

Choosing bond issuance ahead of its foreign cash to refinance the program is a bright move. Apple will apparently dodge a possible tax charge of about $9.2 billion by using the tax-deductible debt to finance the share repurchase. Additionally, according to calculations which revealed that Apple would be paying approximately $8.26 for every share repurchased, the company paid about $4 dollars per repurchased share every year. The company would have been paying a total of $12.20 per share based on the improved quarterly dividend. However, that is if it chose to refinance the whole program via improved dividends, without a share repurchase option.

The Bottom Line

There is no better way to restore investor confidence in a stock, which has largely suffered not because of poor fundamentals, but high expectations. Apple is among the best companies in its industry fundamentally, with a wide moat in terms of brand, margins and profitability. However, recent statistics on its performance at Nasdaq suggest otherwise. The company has moved swiftly to quell the negative publicity by offering investors a share in the cake, without having to expose its more than $100 billion worth of cash hoards stashed overseas.

Additionally, the company has taken a more prudent approach in providing guidance for future revenues, which seems to be paying off handsomely. In as much as market shocks are in most cases temporary, a continuous series of such positive shocks could help in restoring confidence in Apple's stock. The investors now expect a healthy dividend, and the company's cash remains intact and ready for the right reinvestment. So why not smile?

About the author:

Nicholas Kitonyi
Nicholas is a financial analyst by profession with extensive experience in investment research and stock market analysis. His analysis has been featured on some of the leading investment research sites like Seeking Alpha and Benzinga.

Nicholas has a solid knowledge of both the U.S and European markets having done several stock analysis over the last three years. His investment style is focused on undervalued plays and growth stocks. As a trader, Nicholas classifies himself as a swing trader and likes to trade GBP/USD, Gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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