There are many factors that come into play when trying to figure out whether or not you want to invest in a company and simply looking at the dividend yield, P/E ratio or P/B ratio just isn't enough. It works in your favor to find out as much information as possible before putting any money down. Personally, I'd like to know where my money is going and what type of company I am financially standing behind.
The first checklist is based on famous growth investor Phil Fisher and his 15 points to look for in a common stock, in which the company's management qualities and characteristics of the business are observed.
"I don't want a lot of good investments; I want a few outstanding ones," Fisher has said.
1. Does the company have the products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
Net sales rose 7% compared to last year due to the increase in net sales of various Apple products: iPhone, Mac, iTunes, software and services, accessories.
Although the company is very secretive about new products, Apple (AAPL, Financial) has continued to release successful products each year. Besides the new watch that is said to come out at the beginning of next year, the company continues to update products that are currently out on the market, such as the iPhone, for example, or the MacBook Air and MacBook Pro, which now have faster processors and lower prices.
So, the short answer to the question would be yes, as long as Apple continues to come out with new and improved versions of the iPhone and MacBook, as well as other Apple products.
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
During the first quarter, Apple introduced iPad Air--the fifth generation iPad and iPad mini with Retina display. The company also introduced the new iPhone 6 and 6 Plus on the market, In October, the iMac with Retina 5k, the OS X Yosemite and an updated version of the Mac mini were released.
I have confidence in saying that Apple will continue to produce and enhance its products. Overall, the company appears to have a sense of pride and a strong belief in its products.
3. How effective are the company’s research-and-development efforts in relation to its size?
R&D for this year was $6 billion, reaching its highest level since 2007 when the iPhone was first introduced to the market. The research budget has grown more than sevenfold in the past seven years.
Because Apple is part of such a competitive market, the company must continue to introduce new products, services and technologies and also enhance products currently on the market in order to keep up with its competitors.
Steve Jobs’ shoes will always be impossible to fill, but Tim Cook is doing a fine job as CEO so far. According to an article written by the Wall Street Journal, Cook was arguably a better manager than Jobs. He was organized, prepared and more realistic about the burdens of being in charge of a company as big as Apple.
Arguably, some say Apple lacks the innovation it once had, but the father of the company has passed along with his own personal visions and the show must go on. The “Applites” must now carry on without him while trying to keep the nature of Apple alive. But we must realize and accept the fact that there will never be another Steve Jobs.
“Without the arrival of a new charismatic leader, it will move from being a great company to being a good company,” said George Colony, CEO of Forrester Research. “Like Sony (SNE, Financial), Polaroid, Apple circa 1985 and Disney (DIS, Financial), Apple will coast and then decelerate.”
Overall, yes, Cook is a better businessman and is all about the data, but he lacks the innovative imagination of Jobs.
4.Ă‚ Does the company have an above average sales organization?
Apple depends on the careful placement of its retail stores in busy shopping malls and high-traffic shopping areas to attract new and returning customers. Not only is Apple known for its extremely busy stores, the company is also infamous for its advertising. Apple also invested in high-quality fixtures, merchandising materials and other resources.
Honestly, without commercials and marketing, the iPhone, MacBook and iPad could sell themselves because of the simple fact that they came from Apple.
5.Ă‚ Does the company have a worthwhile profit margin?
On our website, we gave Apple’s profitability and growth a score of 8 out of 10, which indicates a healthy situation.
Gross margin measures a company’s ability to turn sales into profits, which is something Apple is very good at because the company doesn’t have to cut prices in order to keep up with its competitors.
Gross margin=(Rev-Cost)/Rev
GM= 38.01%
In 2012, gross margins were at a high of 47.4%, thanks to sales from iPhone 4s. In Q3, GM dropped to 36.9%, as the company was getting ready to launch two new iPhones and iPads.
6. What is the company doing to maintain or improve profit margins?
Apple’s gross margin percentage increased from last year’s but was lower than 2012’s. The increase from last year’s was driven by multiple factors, such as lower commodity costs, a shift in products with higher margins and improved leverage on fixed costs due to higher net sales –Â offset by foreign currencies compared to the U.S. dollar, which resulted in price reductions and higher costs on certain products.
Here’s a look at the gross margin percentage from 2012-2014, along with predictions for next year’s:
2012: 38.6%
2013: 37.6%
2014: 43.9%
2015: The company predicts it will be between 37.5-38.5%
Apple also believes gross margins will be on a downward pressure due to competition increases, global product pricing pressures, reduced product life cycles, product transitions, the U.S. dollar becoming stronger, potential cost increases in manufacturing and a potential shift in the company’s sales mix with products with lower gross margins.
7.Ă‚ Does the company have outstanding labors and personnel relations?
Recently, Apple employees were given a memo outlining improvements in their benefits, which includes longer parental leave and subsidized student loan refinancing (the link above gives a more detailed description of the employee benefit additions).
Apple employees have praised the work environment and really like the fact that management does not micromanage, but one of the complaints is that it’s difficult to move up in the company. Once you’re working on the retail side, you can pretty much forget a move up to corporate where the employees enjoy good food in the cafeteria and free transportation to work. Also, the company does not offer ongoing training courses to help employees sharpen or maintain their skills. Lastly, work/life balance seems to be lacking and although the company has made promises to fix this, it has not been addressed.
8.Ă‚ Does the company have outstanding executive relations?
Since work can be very demanding, with 70-80 hour work weeks, it’s no surprise the Apple campus offers free transportation to work, wellness, good food and is aiming to be one of the best business campuses in the world. Unfortunately, the nice campus doesn’t distract employees from feeling as though promotions are based on favoritism and personal relationships.
As far as how the executives are paid, they are for the most part above average when compared to the average salaries in their fields. For example, a Global Supply Manager at Apple averages around $128,956/year, which is 2% above the national average. A Software Engineer III from Apple receives around $119,336/year, which is 12% above the national average, yet employees feel that Apple’s salaries do not coincide with the company’s growing success rate.
9.Ă‚ Does the company have depth to its management?
Tim Cook has a 94% approval rating on Glassdoor.
One of the most common complaints has also been that retail management and corporate need to find a better way to communicate. Also, as stated before, personal relationships seem to get people promoted instead of basing it off work and performance alone. The strict zero-tolerance attendance and tardiness policy is also something employees question because a lot of quality employees have been let go due to it. On a positive note, the work environment and management style overall appear to keep employees motivated and happy.
10. How good are the company’s cost analysis and accounting control?
The total operating expenses for 2014 was $18,034, whereas last year expenses were at $15,305. Research and Development (currently at $6,041) increased by 35% from the previous year. One of the challenges Apple faces is that it obtains components from single or limited sources and so therefore, it is subject to significant supply and pricing risks. On the other hand, the company does use some custom components that come from one source.
11.Ă‚ Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
One of Apple’s downfalls is its price range. The company is known for being on the expensive side and its competitors offer similar products at relatively cheaper prices. Apple outlined in the most recent financial report how it sees the competition growing significantly due to other companies imitating Apple’s features and other companies collaborating with each other to offer more competitive solutions than what they are currently offering on the market.
12.Ă‚ Does the company have a short-range or long-range outlook in regards to profits?
Apple has a long-range outlook.
The company recently acquired Beats Music, LLC and Beats Electronics, LLC. Also, Apple is constantly coming out with new and updated versions of current products on the market, contributing to the company’s long-term profitability.
13. In the forseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from the anticipated growth?
Apple spent $17 billion on stock buybacks, which is three times the amount spent in the previous June quarter and one year ago.
Apple performed almost half of the buybacks alone, spending an all-time record of $8 billion to buy back shares on the open market.
“Our strong results continue to generate significant cash, and we’re extremely happy that this has enabled us to make substantial investments in Apple’s future…”Chief Executive Tim Cook said.
14. Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
Apple is known for having a secretive nature, which can be both glamorous and annoying at the same time. Employees are not allowed to discuss product knowledge with anyone, including family. Kevin Lynch, the company’s VP of Technology, even kept tight lips about the Apple Watch to his wife, who claims she didn’t even know about it until her husband made the announcement.
The secrecy can disrupt the positive energy Apple gives off, however. A Chinese employee even committed suicide due to the secrecy when he jumped from the 12th floor of an apartment building after a new iPhone prototype was either lost or stolen in his care because Foxconn, the manufacturing company he worked for, was holding sessions to torture him for the slip.
Some have even said that the level of secrecy the company applies to its business is over the top, ridiculous and unnecessary.
15.Ă‚ Does the company have a management of unquestionable integrity?
I wouldn’t go as far as saying the management at Apple has unquestionable integrity when it comes to employees, but I do see a common theme of loyalty when it comes to the company as a whole. Employees seem to really stand behind Jobs and the impact Apple has had on the world and are truly proud to be part of something that has such an influence on the technology we use today.
Overall, Apple received a score of 3.6 out of 5.
Take a look at how Google scored here.
