Why Apple is a lot like Gary Player right now

Legends of Golf in Savannah, GA April 19, 2010

There are many times when you buy a particular stock and then question why you own that particular stock. In fact, it happens all of the time, when you get your weekly, monthly or annual statements, it is after all supposed to be part of the process, making sure that the thesis is still firmly intact. Making sure that the specific investments that you own still fit the profile, still match all the criteria that you are looking for as an investor. It is Warren Buffett’s friend and right hand man who always says that it isn’t supposed to be easy. What he (Charlie Munger) means by that is stock investing of course is harder than most people think, it is only the longer you do it that you realise that. Unlike large amounts of push ups and bunker shots for South Africa’s most decorated golfer. True story, say what you want about Gary Player (80 years old), at 9 majors, he is more than double that of the next South African.

Perhaps that is the perfect analogy for Apple inc., comparing them to a fit, even if older Gary Player, at this current point in their product cycle. The company has delivered the most incredible electronic products known to mankind, they really do make the most beautiful devices, having started over a decade ago, changing the company from the original PC maker to recognising how music needed to be spread in the digital era. It certainly did not invent the smartphone, but has come close to perfecting it: the latest version of the phone, the 6S is a truly amazing human achievement. Although there is a big difference here, I think often commentators and the casual observer (with a large platform of hungry spoon fed mobs) compare too easily companies and countries to that matter, to living beings. GE has been around for over a century, and no doubt will be around for another century.

Apple is a little over 40 years old and the founders are no longer involved: one of them has departed the earth, the other is a bearded man who had an accelerating Prius (no laughing matter) once upon a time. Tim Cook, the man who runs the business has legendary work ethic. The product and design team, led by (Sir) Jony Ive churn out beautiful products. So I don’t think that is the problem either. The management and the products are both great.

Don’t worry about the resources either. At the close of the bell when Apple released its numbers for the quarter just passed two evenings back, it had US$233-billion in cash and cash equivalents. That is around 43.3% of their closing market capitalisation on Wednesday. It does have US$64.4-billion worth of debt, aiming to get that to rise to as much as US$87-billion (we will get to why in a bit). That is still an astonishing 31.3% of net cash in the market capitalisation, for every 100 cents of Apple share price that you own, 31 odd cents is cash, the other 69 cents is the rest of the business.

So why is the market beating up on the stock? The stock fell as much as six percent on Wednesday to close at US$98 a share, the historical multiple now sits at under 11 times earnings. Plus the quarterly dividend has been boosted to 57 cents, that puts the current yield at 2.3%, after 15% dividend tax that equals just short of two percent. Hardly a king’s ransom, but very acceptable in light of the fact that rates are set to gradually rise in a longer dated trajectory that most think. The ten year treasury for comparisons sake (US Treasury) yields 1.85%.
Earnings were a meet, sales showed the first quarterly comparable decline in 51 quarters, that is a very long time and showed how a consumer electronics stock was resilient through the greatest financial crisis in living memory.

It wasn’t the numbers that disappointed, it was the guidance for the next quarter that missed the mark. The stock is, after all, trading on the same metrics as a Chinese steel mill. I suspect that trading on very low valuations is a function of the present term investor questioning whether or not they should be buying a company that has their flagship product not growing, even if it is presently. Some of the material that I have read suggest that many discount the only real growth business (presently), the services business, which generated US$5.991-billion of the US$50.557-billion in revenue. Gene Munster, who has been positive on Apple for some time now (he has presently some scrambled egg on his face), suggested that business standalone could be worth as much as US$200-billion Dollars. Revenues of US$25-odd-billion, growing at 20% means that Munster possibly has the stock closer to a Google type metric of 30 times earnings to get to that valuation.

So, we have been pretty philosophical about the earnings, which not only show that the company will possibly sell fewer iPhones this year than at any other stage in that product cycle (we still have the next phone cycle to look forward to), the usual comments about next big product launch gets asked all the time. The car, the TV, virtual reality (where are those people who laughed at the Zuck when he bought Oculus?), I am sure that the company will deliver products that meet the expectations of the fans. There are many territories where they can sell a sharply higher number of products into. The flagship product is just going through a levelling off, somewhat. The share price is factoring in little or no growth. We suspect that this is just temporary, we are certainly not alone in making this assumption, that does not mean you are right of course. We remain buyers and confident that growth will return, perhaps only later in the year, by that time the share price would have adjusted. We certainly think that this is a big opportunity and still rate the stock a strong buy.

This article by Sasha Naryshkyine is adapted from the Vestact newsletter and is republished with permission.

Image: Keith Allison via Flickr.



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