FTSE100 @ 6027.37, +129.56 (2.20%)
DJIA @ 13412.55, +308.41 (2.35%)
NASDAQ100 @ 2746.47, +85.54 (3.21%)
Apple @ 549.03, +$16.86 (3.17%)
Wow, what a difference a New Year and a little less uncertainty makes!
And whilst it wasn't the great deal that Obama wanted (or so he says), and does little to address the growing deficit, the early signs are that the House of Congress agreement might just be enough to reduce the legacy threat of self imposed, time dated tax increases and budget cuts that were anticipated to jerk the US back into recession.
It also shows what might have been last year (just 48 hours earlier), had the US managed to steer clear of the fiscal cliff a little sooner.
As it is for my portfolio the "what might have been" 1 day gain of 2.4%, will now sit in 2013 (next crisis allowing, of course).
Prior to this poorly conceived spaghetti western, I was convinced that the US would put something in place, or at least postpone things, but became much less certain as events transpired and was ultimately disappointed that the stand-off lasted beyond even the last minute of 2012.
Unfortunately, with uncertainty growing, I also allowed fear of the unknown to influence/dissuade me from investing which saw me miss a couple of earlier opportunities to top up on such as BP, IG, and Tesco, which is what fear and uncertainty can do to you.
But, with fingers crossed and clenched to my security blanket, and right up to the last day of the year I had been eyeing up BP, and Apple.
The combination of uncertainty and shortened trading sessions then left me with one, Apple, and even then I was anticipating it falling further on New Years Eve (bizarrely it seemed to be the only US share not falling), so I almost didn't deal at all.
But with Apple on a little over 10 times forecast earnings (at $509 prior to markets opening on New Year's Eve), I couldn't help but recall my post of last year: Apple: Cheap at 11.4 times 2012 earnings?, when the shares stood at $395.95.
And, despite the challenging comparable's, and better organised competition, Apple is still expecting to sell more iPhones, and iPads etc. than it ever has before.
There is speculation that margins are under some pressure though, particularly given the investment in, and introduction of, the raft of new products introduced over the last few months.
This slowing growth in profits and revenues, supported by a variety of comments from the competition seems to have been the banner under which the markets have enthusiastically discounted the share price from its peak of $705 back in September.
Add in various analyst's opinions that, in the run-up to Christmas, Apple has reduced orders into its supply chain, then the whole fearful picture starts to herd investors towards the exit as market commentators queue up to call time on Apple.
The problem with this is understanding the lead-time lag, Christmas requirements v. rest of year, and where initial new product stock/production line inventory is recognised e.g raw materials, work in progress, lost yield, finished stock, or goods sold.
There is also a further un-quantifiable factor prompted by uncertainty over the fiscal cliff, where it has been suggested that a number of long time shareholders might well have realised profits in order to avoid the threatened increase in capital gains tax that would have come had the House of Congress not done its job.
Apple also chose not to pay a special dividend (return capital), as some companies did, to pre-empt a rise in dividend tax from 15% to 40% which might have served as a further prompt.
If this fiscal cliff sell-off has taken place, it wouldn't be unheard of for these shareholders, and funds, to start buying back in at these discounted level now that some of the uncertainty has passed.
So lots and lots of speculation and doubt over Apple with little actual detail to go on but the consensus seems to be that the company will deliver increased sales but that the year on year and quarter on quarter increase is slowing.
As should be expected of course.
From analysts expectations, the consensus seems to be for an increase in pre-tax profits of 12.7% based upon net profits of $62.866bn from sales of $191.185bn (courtesy of Digitallook).
This translates into an incremental change of $7.1bn over last years base of $55.763bn.
But, the numbers are still huge and it is surely unprecedented for any company to maintain this kind of exponential growth.
Putting it in perspective, and dividing the current forecast increase into the previous years base (2011), delivers an increase of 20.7% ($7.1bn / $34.205bn).
Dividing $7.1bn into the 2010 base of $18.504bn would be 38.3% and so on and so forth.
I guess what I am trying to convince myself of is that continuous exponential growth is impossible but that the actual $ increase in profits compares well to previous years and that it is the base that is the challenge to one's perceptions.
Any company in this position then needs to monitor and hopefully maintain costs/margins at the same incremental rate.
In this case, as the market matures and becomes more competitive, Apple is also experiencing a margin pressure but, has still given guidance in the region of 36% for gross profits.
Unfortunately, this is noticeably less than the 44% reported for the 2012 full year although that did include a Q1 figure of 47.5%.
This could easily be a result of the new products though, whether that be from investment, inventory, and/or initial yields as manufacturing processes are proven.
Ongoing costs may come down as productivity and yields increase.
On the other hand it might also be the case that this is a new lower base for the company with widespread speculation that, going forward, the time between new product introductions will shorten in line with greater competition.
Unless Apple can come up with the next jump in technology and new market changing product of course.
The year on year gross margin figures look much flatter though having been maintained around/above a market leading 40% since 2009.
Traditionally, Apple guidance has also been notably conservative, which analysts have cottoned onto, so often use this as a base to inflate from.
But, at $549.03 per share and now on 11.2 times forecast earnings there seems to be little expectation for Apple to deliver such exponential rates of growth.
The company also has no debt, and cash balances that continue to grow ($121.4bn est.), despite the resumption of dividend payments.
How many companies are valued at $121.4bn never mind have that level of cash on the balance sheet.
At $549.03 per share and with 940.69m shares in issue the company is currently valued at $516.468bn.
- $549.03 * 940.69m = $516.467bn
However, discounting $121.4bn of cash results in a valuation of the underlying business at $395.067bn.
- $516.467bn - $121.4bn = $395.067
$395.067bn divided by 940.69m shares suggests an underlying share price of $419.98 ie. $ for $, $129.05 of the current share price is covered by hard cash.
- $395.067bn / 940.69m = $419.98 per share as an ex. cash adjusted share price.
Taking the current earnings per share forecast of $49.1766 and dividing it into $419.98 results in a price to earnings ratio of just 8.54 times.
- $419.98 / $49.1766 = 8.54 times.
8.54 times!
Does that qualify it as cheap, or a bombed out value share with few prospects in the short term?
So with increasing sales over the Christmas quarter still being forecast, and holding an enviable market share in an ever expanding market, I have taken the plunge and bought more Apple shares with a view to them finding a way back to $700 which would put them on a forecast price/earnings of 14.24 times, or 11.77 times if that cash pile is taken out.
Not exactly a racy valuation is it?
The next earnings report is due on the 23 January so not long to wait then, and fingers crossed that the numbers and company rhetoric will give me a little confidence and take away some of my "uncertainty" that follows a new purchase!
Related article links:
- http://seekingalpha.com: Apple: Gross Margin Conundrum Explained
- http://appleinsider.com: Despite having $121B in cash, Apple not expected to issue special dividend
Earlier post:
- Apple: Cheap at 11.4 times 2012 earnings?
- December 2012: Portfolio Update (2012 Year-end).
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