The Jensen Investment Committee recently added Apple (AAPL, Financial) to the portfolio. Apple is a well-known, global consumer electronics company.
Over the years, we’ve answered the question many times as to why we didn’t own Apple. Quite simply, it didn’t achieve 10 consecutive years of greater than 15% return on equity. Last year it qualified. After running it through our research process, we added it to our portfolio bench because it possesses the qualities we seek in a quality growth company including durable competitive advantages, strong free cash flow, a seasoned management team and an attractive growth profile.
Fundamentally, the company’s competitive advantages, such as its iconic brand, innovation and economies of scale, are sound. Additionally, Apple enjoys a network effect from the apps and services business that is strengthening as the company provides more services such as Apple Pay and Apple Music.
Financially, Apple is robust. The company has more than $200 billion in cash and equivalents on the balance sheet. Apple comfortably generates more cash than it needs and returns a significant amount to shareholders via dividends and share buybacks. While the company has generated high double-digit top line and bottom line results in the past, such results will likely slow but stabilize into what is an attractive growth profile where Apple can continue to deliver consistently high returns on capital.
Despite the loss of Steve Jobs, current CEO Tim Cook and his team have proved themselves highly effective in driving the company forward by launching new products such as the Watch, upgrading existing product platforms and expanding services and apps. The current team is appropriate to guide Apple as it navigates its future.
Now is the time to add Apple to the Jensen Quality Growth Fund not only because of its attractive valuation and strong fundamentals, but also because our sense is the company is at a transition point. We see it evolving from primarily a premium consumer electronics company to one that offers a robust ecosystem of apps and services that serve to enhance customer monetization over the life of the relationship and increase customer switching costs from the Apple ecosystem. While this business is just under 10% of Apple’s revenue, its high margins can enable Apple to preserve and even enhance the company’s overall margins if lofty device margins become pressured in the future.
We are pleased to add Apple to the Jensen Quality Growth Fund. Its balance of competitive advantages, financial strength and an effective management team make it a worthy addition.
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