Apple Rediscovers Growth iDentity

8/4/2014


  Recent Price
$98
  Dividend
$1.88
  Yield
1.9%
  P/E Ratio
16
  Shares (millions)
6,052
  Long-Term Debt as % of Capital
19%
  52-Week Price Range
$98.38 - $62.05

For years, Apple ($98; AAPL) seemed indestructible. Until September 2012, when the stock suddenly crumbled, overcome at last by the crushing weight of expectations, a pipeline depleted of flashy new gadgets, and profit margins besieged by cheap knockoffs.

In the months that followed, Apple shares spent much of their time on the sidelines, rising just 5% in 2013 while the S&P 500 Index surged 30%. During that period, investors seemed to reset their expectations as the once-nimble company dealt with the growing pains that came with abruptly transforming into a behemoth. Consider that the iPhone unit alone generated more revenue in the last year than Boeing ($122; BA), Johnson & Johnson ($102; JNJ), or Microsoft ($44; MSFT). Even the oft-overlooked iTunes, software, and services unit produced more revenue than 72% of S&P 500 companies.

The stock has rebounded this year, up 23% and well ahead of the S&P 500's 7% gain. Apple scores in the top 25% of our research universe for all six Quadrix categories, and its sector-specific scores are 90 or higher. Apple, yielding 1.9%, is a Buy and a Long-Term Buy.

Comeback story incomplete

Long gone are the quarters when Apple's revenue and profits leaped tall buildings in a single bound. Still, Apple posted solid June-quarter results in a transitional period ahead of a busy schedule of product launches this fall. Cash from operations jumped 31% to $10.26 billion, while free cash flow surged 60% to $5.01 billion. Rising demand in emerging markets propelled iPhone sales 9% higher in the June quarter, despite rumors of a major overhaul coming to the device this fall.

For now, investors are fixated on what Apple left unsaid. True to its nature, Apple has kept quiet on its lineup of new devices. But published reports say Apple wants manufacturers to produce an initial 70 million to 80 million of the new, larger iPhones — with displays measuring 4.7 inches and 5.5 inches, versus the current 4-inch screen. Those numbers compare favorably to the first batch of iPhone 5S and 5C produced last year, estimated at 50 million to 60 million.

Apple may also launch its so-called iWatch this year. Analysts speculate that Apple expects to ship 50 million smartwatches in the first year, and one predicts the device could boost Apple's revenue 3% to 6%. Apple's enterprise business is also gaining momentum, helped by a deal with IBM ($195; IBM) that could boost sales of iPhones and iPads.

Conclusion

It's not clear whether Apple has settled into a mature growth phase or is winding up for another major growth spurt. But profit projections seem manageable, with the consensus calling for 11% growth in fiscal 2015 ending September. And the stock, earning a Value rank of 80, looks reasonably priced. With shares hovering near their all-time high, Apple's trailing P/E ratio is roughly in line with its five-year average, yet 12% below the median for S&P 500 technology stocks.

An annual report for Apple Inc. is available at 1 Infinite Loop, Cupertino, CA 95014; (408) 996-1010; www.apple.com.

APPLE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '14
1.28
vs.
1.07
6%
95.05
-
73.05
16 - 12
Mar '14
1.66
vs.
1.44
5%
80.03
-
70.51
14 - 12
Dec '13
2.07
vs.
1.97
6%
82.16
-
68.33
15 - 12
Sep '13
1.18
vs.
1.24
4%
73.39
-
57.32
13 - 10
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
170.91
5.68
1.63
96.68
-
55.01
17 - 10
2012
156.51
6.31
0.38
100.72
-
50.61
14 - 12
2011
108.25
3.95
0.00
60.41
-
39.68
15 - 12
2010
65.23
2.16
0.00
42.10
-
25.81
13 - 10
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
78
80
98
92
87
93

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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