Apple (NASDAQ:AAPL), the iPhone, iMac and now Apple Watch giant, the all things consumer-technology related juggernaut, reports their Q2 ’15 financial results after the bell on Monday, April 27th, 2015.
Per Thomson Reuters, analyst consensus is expecting $2.16 in earnings per share (EPS) on $57 billion in revenue for expected year-over-year growth of 30% and 23% respectively. Given the monster iPhone quarter in AAPL’s fiscal Q1 ’15, (ended December ’14), AAPL’s EPS is expected to decline 29% sequentially, on a 25% sequential revenue drop.
My own take on expectations is that the Apple iPhone 6, which was expected to sell 50 – 60 ml units in the holiday quarter but instead blew away expectations by selling 74.5 million, will likely beat subdued expectations again in Q2, with some headline noise thrown in from the successful launch of the Apple Watch. Don’t forget the iMac either, which——while just 5% of Apple’s total units in Q1 ’15 (dwarfed by the iPhone)—is still a higher-margin product.
For me as a cash-flow investor, Apple is less about the next great product, and more about excess capital.
Carl Icahn is badgering the company about the $145 bl in longer-term cash and investments on the balance sheet, all of which comes to about $30 per share in cash (versus $32 bl on longer-term debt) and what AAPL, and Tim Cook and the AAPL CFO will do about it.
That is the next likely catalyst in my opinion, and with the onerous tax issues around non-US cash repatriation, maybe it slows down the activists a little bit.
The amazing thing about Apple is that the quality of their earnings is improving given the cash-flow coverage of net income, which I track religiously. Here is a brief history (by quarter) of AAPL’s cash-flow coverage of net income (4-quarter trailing cash generated from operations / net income):
- Q1 ’15: 159%
- Q4 ’14: 151%
- Q3 ’14: 146%
- Q2 ’14: 143%
- Q1 ’14: 143%
- Q4 ’13: 145%
- Q3 ’13: 140%
- Q2 ’13: 139%
- Q1 ’13: 136%
- Q4 ’12: 101%
AAPL’s dividend is just 20% of AAPL’s free-cash-flow so there is substantial room for upside, without disturbing the share repurchase plan.
So what is so scary about the stock and the story?
Fundamentally, the stock is still very reasonably valued at just 15(x) expected 2015 EPS of $8.71, for expected 3-year EPS and revenue growth rates of 18% and 12% respectively. Removing the $30 per cash from the stock price, AAPL is trading at just over 10(x) this year’s EPS.
Technically, the stock is locked in a trading range between the February ’15 high of $133 and the late November ’14 high of $119.75. A trade below $119.75 and AAPL drops to $100. A trade above $133 on volume, and the stock has broken out again.
Sentiment: Who doesn’t own or who isn’t wildly bullish on AAPL these days ?
The fundamentals are bullish, the technicals are indifferent right now, while the positive sentiment is clearly negative for prospective returns.
The only real negative I can find in the fundamental story for AAPL is that the current expectations for fiscal 2016 (i.e. next year) is for 5% revenue growth and 8% EPS growth. Clearly the Street is not expecting an iPhone sequel or encore.
My valuation model puts a $180 intrinsic value on AAPL, while Morningstar values AAPL at $120. Split the difference and you get $150 roughly, per share.
Icahn thinks it is worth $200 but I think to get there AAPL has to deal with all the balance sheet cash, or hit another home run with a major product. I’m unfamiliar with how AAPL releases their dividend news, but the dividend is due for an increase again after the March quarter.
I am neutral weight AAPL for clients with between a 3% – 4% position in the stock within client accounts, but the fundamentals tell me the stock could easily get to $175 – $180.
AAPL’s earnings weight in the SP 500 is north of 6%, per the above link, and think of the stock’s weighting in the Nasdaq 100.
What worries me is that with sentiment and ownership, if everyone should head to the door at once, it could be truly ugly.
That is my take on the stock, and I remain long. What an incredible story, and the valuation is still very reasonable.