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Market Minute – April 24, 2013

April 24, 2013
David Matias

Apple Earnings Release

It is impressive how the market can fixate on a single stock.  Apple has been that focus for a few years now – on the way up and on the way down.  And while I rarely focus on a single company given the diverse nature of our investment strategy, Apple is as much a mainstream news event as American Idol.

Last night Apple released their earnings from the past quarter (their Q2), and gave some guidance for the next quarter.  While there has been a tremendous focus on Apple’s “lost mojo,” they actually did extraordinarily well – selling 37.4 million iPhones in the quarter – a small gain over the same quarter last year.

That fact is huge.  Despite the bad press, the cratering stock price, and the onslaught of competition from Samsung, HTC and others, people still want Apple products in record numbers.  The distorted market perception ignores the global diversification that Apple accomplished last year.  Now two-thirds of their revenue comes from abroad, attributable to the fact that they expanded into over 100 new phone markets in 2012.  To emphasize the appeal of their products, iPad sales increased by 65% over the same period.  Not a small feat – and one done extremely well.

To give you a little context, iPhone and iPad sales combined to roughly 57 million units for the three-month quarter.  That translates to roughly 26,000 sold every hour of every day, or 440 units per minute.  Given an average selling price of $612 for the iPhone and $449 for the iPad, that is stunning demand for a premium product.

The downside is that Apple will not have any new phones, pads or game-changing products for at least another four months – an eternity in the minds of stock traders.  But in my opinion, that is fine.  What Apple has done thus far in logistics and supply-chain in unprecedented.  To wait and build that supply-chain for the next wave of products over the following year is perfectly acceptable for a long-term view of maintaining the world’s most valuable brand.

Consistent with this philosophy, and solidifying the slow-growth nature of such a large market footprint, Apple is radically changing their balance sheet structure to be more friendly to value-based investors.  It is well overdue – this should have been done last year and created a wicked backlash from investors – but the changes are good ones. First, they boosted the dividend to a 3% yield.  Second, they increased their stock buyback by $50 billion, reducing the stock float by 15%.  And third, they will bring debt onto the balance sheet for the first time in decades.  All of these changes have the net result of increasing the value per share, flowing cash to stockholders, and lowering the stock volatility in the long term.  In short, they will now be a value stock.

Unfortunately, Tim Cook and Apple’s culture took many missteps before getting to this point, and the stock has suffered mightily.  Some of those missteps were addressed last night.  Next is execution on the business strategy and the ability to create new and exciting products – and that again is where time will tell.

Regards,

David B. Matias, CPA

Managing Principal

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