Apple Strikes Out On New Frontiers

3/9/2015


  Recent Price
$129
  Dividend
$1.88
  Yield
1.5%
  P/E Ratio
17
  Shares (millions)
5,882
  Long-Term Debt as % of Capital
21%
  52-Week Price Range
$133.60 - $73.05

Apple ($129; AAPL) can evoke a flight of fancy for even the most grounded people. Investors who watched its stock quadruple since the beginning of 2009. Hedge-fund managers who salivate over its $178 billion in cash and marketable securities. And analysts who try to estimate revenue streams for new products, whether announced or merely rumored.

We view Apple, a Focus List Buy and a Long-Term Buy, as reasonably valued with robust operating momentum, outstanding Quadrix scores, and several catalysts that could propel shares higher over the next year.

Apple has rediscovered its growth groove after a tumultuous fiscal 2013 ended September, when per-share profits slumped 10%. Per-share profits are up at least 15% in each of the past four quarters, including a 48% gain in the December quarter. Growth has accelerated in three straight quarters for both sales and operating cash flow.

Most of that growth comes from the iPhone (60% of revenue in the 12 months ended December). Demand for the new iPhone 6 and 6 Plus outstripped supply in the December quarter. The iPhone 6 Plus helped the average iPhone selling price to climb 8% last quarter.

Operating profit margins rose to their highest point for any quarter since the three months ended March 2012, as the less-profitable iPad made a smaller contribution to operating results. Sales of iPads (14% of revenue), down 15% in the past year, are steadily declining and could continue to fall as the device gets cannibalized by the iPhone 6 Plus and loses share in the tablet market. Apple captured 26% of global tablet sales in 2014, compared to 33% in 2013, according to the research firm Strategy Analytics.

At a media event on March 9, after our deadline, Apple was expected to announce the launch of the Apple Watch and pitch consumers to buy yet another device they never knew they wanted. The watch should begin shipping in April. Prices for the Apple Watch will start at $349 and could reach $10,000 for a gold version as Apple tries to court the fashion crowd. Analysts expect Apple to sell anywhere from 12 million to 26 million units this year, possibly leading to an additional $5 billion to $10 billion of revenue. For context, Apple sold more than 192 million iPhones and 63 million iPads in calendar-year 2014.

As Apple finally prepares to launch a long-rumored product, chatter swirls about an even bolder step: an electric car. Several automobile executives ridiculed the reports, and many doubt whether Apple would move into such a capital-intensive business as automaking. But Apple hires others to manufacture and assemble its devices and has reportedly met with Magna International ($109; MGA) to explore a similar deal. Even if no Apple car ever materializes, the company could use the project to find new ways to expand its presence in cars.

Apple shares, up 70% in the past year and now at 17 times trailing earnings, trade within 4% of last month's record high and 13% above the five-year average P/E ratio. However, at 15 times estimated year-ahead earnings, the stock fetches a 20% discount to the technology sector median.

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
Dec '14
3.06
vs.
2.07
30%
119.75
-
95.18
19 - 15
Sep '14
1.42
vs.
1.18
12%
103.74
-
92.57
17 - 15
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
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
182.80
6.45
1.81
103.74
-
68.33
16 - 11
2013
170.91
5.68
1.63
96.68
-
55.01
17 - 10
2012
156.51
6.31
0.38
100.72
-
50.61
16 - 8
2011
108.25
3.95
0.00
60.41
-
39.68
15 - 10
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
94
64
98
91
96
91

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


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com