Taking A Bite of Apple

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Sep 22, 2014
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Contributing editor Glenn Rogers is here this week, fresh from having digested the details of Apple's much-ballyhooed new releases. He likes what he sees and suggests we should too. Glenn is a successful businessman, entrepreneur, and investor who has worked in both Canada and the U.S. He and his family live in Southern California. Here is his report.

Glenn Rogers writes:

I was speaking with Gordon regarding a topic for this month's column and I was amazed to discover we had never written up Apple Inc. (AAPL, Financial), especially given the profound social affects the stock has had on our culture over the past decades and the wealth appreciation of shareholders who have bought in over the years. Therefore, it seems this is a great time to have a look at the company given the announcements this month of the iPhone 6 and 6+ and the Apple watch along with the Apple pay system.

Personally, I sold my Apple stock after Steve Jobs died, reasoning that you can't replace Edison, and the stock did trade down for a good part of 2013. But then it began to recover and the stock has been basically trading up for most of the past year. In fact, Apple shares have gained 82% in the past 12 months.

In June, the company implemented a 7 for 1stock split, which reduced the price from the $650 range (figures in U.S. currency) to the mid-$90s. That was designed to open up the issue to more retail investors. My experience is that after an initial consolidation period following such a split, assuming the company's business stays strong, usually the stock price goes up and that is turning out to be the case.

So let's have a look at Apple now. As I mentioned, on Sept. 9 the company confirmed the least well-kept secret in history when they announced they would finally be delivering phones with larger screen sizes. Samsung had been selling big screen phones for some time with considerable success and it was time for Apple to step up, and they did. Apparently, the preorders have been extremely strong, setting records and beating all previous iPhone releases. One of those orders included me, by the way, so I'm talking my own book to a certain extent. Interestingly, a survey by RBC Capital Markets found that 26% of those who plan to buy a new iPhone will be new Apple customers, with most switching from Android products. This surge in sales great for Apple in that it locks people into their ecosystem and supports their laptop business, iCloud service, and their music business.

It is hard to put a number against the Apple Watch given that most of the offerings in wearable technologies have not been very successful. So far the product has received positive reviews from the techie crowd but it remains to be seen how much of a contribution the new product will make it to Apple's bottom line. The same is true for the Apple pay system since they are breaking new ground here but if that is successful it could create an exciting new revenue stream for the company over the long haul.

Fiscal 2014 third-quarter results (to June 28) showed revenue of $37.4 billion and net profit of $7.7 billion ($1.28 per share, fully diluted). That compares to revenue of $35.3 billion and net profit of $6.9 billion ($1.07 per share) in the same period last year. Gross margin was 39.4% compared to 36.9% in the year-ago quarter. International sales accounted for 59% of the quarter's revenue.

Currently, Apple is forecasting sales growth of only 5.5% this year but it is likely that that will accelerate in the last quarter given the strong sales of the new iPhones. That should continue to drive revenues on into 2015. Keep in mind that the company is expected to generate an incredible $39 billion in net income this year, which gives it endless firepower to return value to shareholders. That cash flow supports a huge $130 billion program of capital returns between dividend payouts and stock buybacks, which gives a strong underpinning for the stock going forward. Right now the company trades at 14.4 times next year's expected earnings, which are projected at $7.08 per share. The trailing 12-month p/e ratio is only 17. That is not overly expensive for a company that is awash in cash.

Additionally, there continues to be rumors of an Apple TV next year and we can expect a refreshing of the tablets and laptops over the next few months as well, giving the company a solid product pipeline that should maintain earnings momentum.

As many of you will know, Apple bought the Beats Electronics business earlier this year for $3 billion, which seems like a large price to pay for a music streaming company that also sells headphones. But they believe it will be accretive to earnings and will help the transition from the iTunes Music Store to the streaming model which is increasingly popular with companies like Spotify and Rdio, both streaming companies that are taking market share from the purchaser music model.

Finally, consider the long bull run we've had in the markets and the increasing nervousness about a significant correction that has developed as a result. Also, don't lose sight of the backdrop of global unrest and uncertainty. In these conditions, having a company of this quality in your portfolio should cushion the blow if there is a major pullback in the market.

Apple stock pays a dividend of about 2%. That's not huge, but it is unlikely that dividend will ever be threatened. If anything, it will steadily increase.

Action now: Buy with a target of $120. The shares closed on Friday at $100.96.