The Problem With Apple

With shares of Apple Inc. (NASDAQ:AAPL) trading at around $461.91, is AAPL an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Apple has become an enigma to many investors. However, the situation is rather obvious. Apple has simply set the bar too high for itself. At the same time, Apple is only trading at 10 times earnings, which makes it much cheaper than Google Inc. (NASDAQ:GOOG) at 25 times earnings, and moderately cheaper than Microsoft Corporation (NASDAQ:MSFT) at 15 times earnings.

Apple has a ton of cash. Debt? Zero. This alone gives Apple tremendous potential. The problem is that the innovation won’t be the same without Steve Jobs. Another negative is increased competition in mobile. There has been much talk about Samsung recently. That’s because Samsung is growing at a faster pace. However, in Apple’s defense, Apple is still the market leader. The overseas markets are getting the majority of attention. In regards to Apple, the argument is that these consumers can’t pay premium prices for Apple products. In reality, Apple is growing overseas despite those high prices. Apple just isn’t growing as fast overseas as some people had anticipated. It’s possible that Apple will lower prices overseas, but not at the expense of margins.

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In regards to security concerns, Apple is taking steps to thwart attacks. This will increase consumer confidence. Even if something substantial were to take place, it would likely only be a temporary setback to the stock price. Apple has more than enough brainpower to figure out a solution.

Below is a chart comparing basic fundamentals for Apple, Google, and Microsoft. These three companies differ in size. Apple has a market cap of $433.76 billion, Google has a market cap of $267.13 billion, and Microsoft has a market cap of $236.63 billion.

AAPL

GOOG

MSFT

Trailing   P/E

10.47

25.15

15.52

Operating   Margin

33.46%

26.68%

35.43%

ROE

38.41%

16.61%

22.62%

Dividend   Yield

2.30%

N/A

3.20%

Operating   Cash Flow

$56.73 Billion

$16.62 Billion

$30.54 Billion

Short   Position

2.10%

1.70%

1.30%

Beta

0.74

1.18

1.14

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Apple couldn’t possibly be any better.

Debt-To-Equity

Cash

Long-Term Debt

AAPL

0.00

$39.82 Billion

$0

GOOG

0.10

$48.09 Billion

$7.21 Billion

MSFT

0.20

$68.10 Billion

$14.22 Billion

 

T = Technicals on the Stock Chart Are Mixed   

Apple has had a great run over a three-year time frame, but the past year has left a lot to be desired.

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1 Month

Year-To-Date

1 Year

3 Year

AAPL

2.46%

-12.70%

-21.36%

105.30%

GOOG

1.33%

14.55%

26.10%

47.60%

MSFT

1.77%

6.64%

-9.10%

2.25%

 

At $461.91, Apple is trading above all its averages.

50-Day   SMA

461.07

100-Day   SMA

460.89

200-Day   SMA

460.59

 

E = Earnings Have Been Impressive             

Revenue and earnings have consistently improved on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

37.49

42.90

65.22

108.25

156.51

Diluted   EPS ($)

6.78

9.08

15.15

27.68

44.15

 

When we look at the last quarter on a year-over-year basis, we see a moderate increase in revenue, but a slight decline in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

46.33

39.19

35.02

35.97

54.51

Diluted   EPS ($)

13.87

12.30

9.32

8.66

13.81

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

Mobile is growing at a rapid pace. This is great news, but hot industries also bring increased competition.

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Conclusion

Excitement is what drives consumer discretionary stocks in the technology sector. Right now, Apple’s numbers look great, but what’s exciting? What’s the new product that’s going to drive growth and get investors excited again? What’s going to make those numbers look even better? Remember, growth is like crack to investors. If investors (and traders) can’t get their fix via Apple, they will get it somewhere else.

The bottom line is that Apple is one of the most financially sound and well-run companies on the planet. The only problem is that investors (or people in general) always want more. Right now, whether Apple can deliver more is up for debate. Therefore, Apple is a WAIT AND SEE. However, it should be noted that Apple is being unfairly treated. If stocks traded on numbers alone, then Apple would be an easy OUTPERFORM.

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