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Apple Inc (AAPL)
When
Apple hit the Zacks Rank 1 buy
list, I couldn’t wait for the opportunity (pullback) to bring it to all
you
momentum readers.
While
you may think you know
everything about Apple, there are some nuances about the product cycle
and the
expectations for the company that make it unique. It’s a
company that everyone says is cheap,
but it never seems to get too lofty in its valuation.
In the
past week alone the company was sued by
Samsung, got a new price target of $710
by Barclays Capital and announced the release of their newer, faster
and higher
definition 4G iPad. By the way, you can
reserve a new iPad
today starting
at $499, for delivery on March 16th.
In the
bullpen is the new iPhone
(5?) which will most likely hit stores later in the year.
Expectations are high for the new product to
blow consumers away after the 4s just seemed to slightly improve on the
previous model. Even though the 4s may
not have met expectations completely, it broke sales records for
Apple.
With
all the excitement, drama and
still relatively low P/E multiple, is this cash generating behemoth
still a
buy?
Company
Description &
Developments
Apple is the world’s number one maker of Smartphone devices and
produces an
array of electronic devices including computers, personal media players
and
peripherals. Since coming public on
December 12, 1980, the company has since grown to have the largest
company by
market capitalization in the world.
The iTunes store, which
houses music, video, applications and more reached 25 billion
downloads, which
is an impressive feat.
Apple’s
key to success will be to keep their momentum going, which for the past
10
years has been truly remarkable. With
the passing of Apple’s patriarch, some Apple pundits (including me) are
wondering if their innovation and focus will continue to impress
customers and
investors.
The
Recent
iPhone 4s and iPad releases seemed a bit lackluster by Apple’s
standards, but
perhaps they are improving their products, keeping them at the same
price while
increasing the time between major form factor and feature changes to
keep
people buying.
Apple
is
good at producing quality products that continue to intrigue and excite
consumers. Peppered into their major
product launches, Apple does an excellent job of refreshing their
entire suite
of products, like they did with Apple TV, which is now 1080p
capable.
Between
Apple OS and Google’s Android,
the two companies control
roughly 80% of the world’s smart phone market and have the eyes and
minds of
millions on their software daily, which is a major market to
capture.
Financial Profile
Apple is a mega-cap (495 billion) company that is trading at about
12.34 times forward
(expectations for next quarter) earnings. AAPL became a Zacks
Rank 1 strong
buy on January 28th 2011.
Apple
reported a quarterly sales increase
of an astonishing 64% at their last earnings report and saw a 97% leap
in EPS
for the same period, which was fueled by the iPhone 4s
release.
Annual sales were up 73% compared to (fiscal)
FY2010 with total sales of roughly 108.2 billion in FY2011.
The
tech giant’s earnings increased
from $15.15 in FY2010 to $27.68 in FY2011 and are expected to earn
$42.96 in
FY2012 according to the Zacks Consensus Estimate.
Normally
growth of this magnitude
would evoke a higher P/E multiple, but Apple seems to trade at values
more like
a Blue Chip than a growth stock.
Earnings Estimates
Apple tends to be rather
conservative and vague in its forward projections, but expected revenue
of
about $32.5 billion and diluted earnings per share to come in at about
$8.50,
which were both higher than consensus estimates.
The
last quarter which included the
holidays and iPhone 4s release was record-breaking with sales of 37.04
million
iPhones, which represented a 128 percent jump in units sold compared to
the
year-ago quarter. They also sold 15.43 million iPads during Q4,
a 111 percent unit increase over the year-ago
quarter and saw a 26 percent unit increase over the year-ago quarter
for the
Mac.
iPod
sales were down 21% compared to
Q42010.
The
company is also generating
massive amounts of cash and managed to book over 17.5 billion in cash
flow from
operations in Q4 alone. Some experts
believe that cash may be returned at least partially to investors in
the form
of a special dividend.
Apple
has a history of surprising
analysts to the upside consistently. This is partially due to their
lack of
commentary and conservative outlooks. They did miss in Q32010 because
the
iPhone release came later than expected.
Over the past 4 reports, their upside surprise was an average of 22%.
Of
the 40 analysts who cover AAPL,
the consensus is for the company to grow earnings by 55% in the current
year
(FY2012) and roughly 11.5% in FY2013.
In terms of the magnitude of
analyst estimate trends, we are seeing all of the consensus estimates
higher
than they were 90 days ago for the current and next quarter as well as
FY2012 and
FY2013. Many analysts have been
adjusting their EPS targets higher over the past 30 days.
Market Performance &
Technicals
When you look at Apple technically, it has been bullish for
quite a period of
time. The stock tends to consolidate for
a couple months and then run up into major product launches and sell on
the
fact, which is what we are seeing with the iPad release.
This
most recent rally has propelled
the stock into all time high territory and left the stock with just
minor
support levels until you get down to the $430 level.
The
stock has managed to track its
50 day moving average for the past 18 months and has maintained above
its 200
day moving average in that same timeframe.
The problem is that the 50 day average is $464 and the 200 day at $397,
both a ways away from the current stock price.
AAPL
has exceeded the S&P 500’s
performance in the past year by almost 47% and outpaced it by over 24%
in the
past 3 months during its recent rally. The
stock remains in a bullish trend and has maintained its momentum in the
past month,
leading the index by about 14%.
The
recent pullback may provide a
good entry for this raging bull. As long
as the broad market maintains its trend, Apple should follow
suit.
For the longer term investor, you have to
feel darn comfortable with the company’s valuations.
Jared
A Levy is the
Momentum Stock Strategist for Zacks.com. He is also the Editor in
charge of the
market-beating Zacks
Whisper Trader Service.
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