Tuesday, April 20, 2010

Apple beats by a country mile. (AAPL)

Shares of Apple (AAPL) are up 5.6% in late trading, after earnings per share for their fiscal second quarter came in nearly a dollar ahead of expectations. As was the case in the previous quarter, revenues came in not only a billion dollars higher than the street's average estimate, but a billion dollars higher than the street-high estimate...wow.

Apple has been covered on these pages several times. Just for a frame of reference, in December I wrote:
With the stock around $200 and cash at $26 per share, Apple still trades at a modest forward Price-to-Earnings of 19. I say "modest," because I find that PE to be reasonable for a truly iconic brand that operates near perfection.
As far as this stock has run, I'd say there's plenty more potential upside. That 4% PC market share is set to grow over the long-term, as Apple is not only increasing the quality of their offerings, but they're becoming more competitive on price. Free Cash Flow Yield(FCFY) is about 5.4% right now, after netting out cash from the company's market value. While not a "juicy" yield, it's better than other rapidly growing firms offer. Apple will likely continue surprising to the upside, making these Free Cash Flow estimates conservative. Add in the potential from new products, such as a new tablet reader that is rumored to be "shockingly" inexpensive, and there could be years of outperformance (vs the market) in Apple shares.
And in January I added:
I'd say the shares will easily hit the mid 200's this year, as it would imply a mid-teens multiple + cash balance. Using a 2010 estimate for Free Cash Flow Yield of 5% and adding in cash would get me to about $230 per share, but with upside potential from new products and the ever increasing desktop market share Apple is grabbing, this stock could command even better valuation levels.
The earnings beats I expected have been delivered. Today's release detailed some impressive numbers. Despite a 131% increase in iPhone sales, iPods only saw a 1% decline on a unit basis. Truly remarkable to see such a low level of cannibalization from a device that does "all that and more" like the iPhone...
Apple sold 2.94 million Macintosh® computers during the quarter, representing a 33 percent unit increase over the year-ago quarter. The Company sold 8.75 million iPhones in the quarter, representing 131 percent unit growth over the year-ago quarter. Apple sold 10.89 million iPods during the quarter, representing a one percent unit decline from the year-ago quarter.
Apple gave its typically underwhelming guidance for the upcoming quarter. They're working at capacity in terms of iPad availability. In one odd exchange on the conference call, their CFO said "there is not a production problem" with the iPad. Yet they had to push off the international launch due to domestic sales demand....so...same thing, folks?

The problem for me in valuing Apple is that the numbers are getting enormous. At the close of trading today, Apple's market value of $221billion was 32% higher than a little outfit called International Business Machines...IBM for short. But my complaining about the huge market value ignores the facts on the ground. The facts are that Apple will probably earn $14 per share this year, and has $25 per share in cash. In September of this year, Apple shares at 18x trailing earnings, plus cash on the balance sheet, would equal $277, or 8% above current levels. A Free Cash Flow Yield(FCFY) of 5% - what I consider fair for this company - implies nearly 30% upside. Either way, I still think shares will head much higher.

One point to assuage the fears of those of us who worry about "the law of large numbers" standing in Apple's way, is the focus on Research & Development. Apple now spends in a quarter what it used to take a year to spend on R&D, and that is where the next big thing will come from...

Copyright 2010 AlphaNinja

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