How Big Can Apple Grow? + Vic Wisemann’s Thoughts on: MCD, IBM, AXP, CVX, T, VZ, and MSFT
 InvestorsObserver Featured Contributor Vic Wisemann |
We are starting to get into the meat of the earnings season. By the end of this week, over half of the Dow Jones Industrial Average component stocks will have reported earnings for the last quarter. McDonalds (MCD), International Business Machines (IBM) and American Express (AXP) have recently reported earnings and Chevron (CVX), AT&T (T), Verizon (VZ), Microsoft (MSFT) and Apple (AAPL) are reporting in the next week.
Of the upcoming reports, AAPL presents an intriguing story. Apple will report its earnings for the first quarter of its 2010 fiscal year on Monday -- just two days before the company is expected to announce new products.
Analysts expect the company to produce an average $2.04 earnings per share in the December quarter, with revenue estimated at nearly $12 billion. That would represent a 17.8 percent increase in sales from a year prior. Gross margins are expected to come in at around 35.6 percent.
What makes this earnings report interesting, however, is the potential effect of accounting changes on the earnings number. This could quite possibly be the only time you will hear me call an accounting change interesting.
Read on to see how an Apple today can put profits in your portfolio.
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Apple stands to gain a lot from a new rule governing how companies recognize revenue from subscriptions. The change could mean that Apple will stop recognizing revenue for its iPhone over a two-year period (the length of a standard wireless contract), and, instead recognize it as soon as a phone is sold.
Before the change, any product that offered free upgrades to software and services installed on a device like an iPhone required subscription accounting. Under the subscription rules, revenue was deferred over 8 quarters in the case of the iPhone and Apple TV. However, the vast majority of the value of the device was realized at the time of purchase.
While the value at the time of purchase as a percentage of the purchase price is debatable, about 90% of the value of an iPhone is realized at the time of purchase. Under the previous rules, Apple was only allowed to recognize 12.5% of the revenue from each sale; under the new rules, the percentage will be decided on a case-by-case basis for each given product.
That case-by-case factor means that Apple's earnings under the new generally accepted accounting principles (GAAP) won't be exactly the same as the non-GAAP earnings it's been reporting for the past year, but they will be a lot closer. Under the previous accounting rules, there was about a 35% difference between the two. Under the new rules, analysts expect the difference to be closer to 5%.
This difference between the GAAP and Non-GAAP earnings has been an ongoing issue for analysts and investors who look exclusively at earnings multiples when deciding if a stock is over or under priced. Generally speaking, a multiple between 10 and 17 would designate a company which is fairly valued; and multiples over, say 25, would represent high-growth companies.
Using the GAAP earnings, AAPL has a multiple of 30, while the non-GAAP earnings give it a multiple closer to 15. You can see the dilemma this presents. Is Apple a speculative growth company and a fairly-valued cash cow?
Now toss in the fact that Apple has practically zero debt and a truly massive cash position. In the 2008/09 year, Apple was approaching $30 billion in cash. The company has since moved some of this cash into intermediate-term securities which are not defined as cash, so that number has dropped a bit. Nonetheless, they have one of the largest cash hoards on the planet.
There are many reasons why Apple stock is approaching an all-time high. The company has a good product mix and is not afraid to step into new arenas as it did with the iPhone. The upcoming release of the iTablet represents another stone along that path. The new tablet device is an important catalyst that can create some near-term stock price momentum and could be a game changer if it sees success like other AAPL innovations.
Apple's stock approaching all-time highs, however, has more to do with the company's earnings, cash flow and ability to sustain earnings momentum and far less to do with proposed new products.
For a nice little hedged trade on AAPL, you may want to look at the April 165/160 bull-put credit spread for a 50 cent credit or better. That's an 11.1% return and the stock has to fall 20.8% to cause a problem.
The stock market is a volatile place. Be absolutely certain you understand the risks and rewards associated with any trade before you put your money at risk. If the trade does not fit your personal risk and reward profile, stay away.
Always do your homework, know your limits, and above all, have some fun.
If you have any additional thoughts, ideas or new product ideas for AAPL, don't hesitate to e-mail me at vwisemann@InvestorsObserver.com.
FREE for 90 days: Get the InvestorsKeyhole Service and our other premium investor services. Plus Over $1,000 In FREE Bonuses! CLICK HERE to begin your 90 DAYS FREE. We can make this 90 day FREE offer because we are confident you will find our service an essential part of your investing toolkit and stay a subscriber for many years to come. Our biggest risk is that we do find people cancel their subscriptions when they move to their own private islands without internet access. |