Does Apple Have a Secret Weapon?

With shares of Apple (NASDAQ:AAPL) trading at around $450, is the company 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

Most Apple investors have heard about the iWatch, but not many investors know any details of the rumored device. Actually, nobody outside of Apple knows the details for sure, but information tends to leak. Whether the information below is accurate or not cannot be confirmed. At this point in time, it must be considered rumor. With that in mind, let’s take a look at what the iWatch may offer. This information may surprise as well as impress many people:

  • Runs on iOS
  • Voice control (personal assistant, Siri)
  • Email and text capabilities
  • Phone calls possible
  • Maps function
  • Monitors vitals
  • Monitors daily exercise time (don’t underestimate this feature in today’s health-conscious world)
  • Operates by kinetic energy
  • Fingerprint scanner
  • 1.5-inch and 2-inch display
  • Bluetooth (connects wirelessly to headphones)
  • Social networking capability
  • Plays music
  • Weather forecast
  • News updates
  • Sports updates
  • Voice recording capability
  • Front-facing camera
  • Curved glass – possibly Willow Glass by Corning Inc. (NYSE:GLW)

The odds of the list above being 100 percent accurate are close to nil. At the same time, there is also likely to be a lot of truth mixed in. If that’s the case, then Apple just might surprise the market with a new innovative product that sticks. The only downside for impatient investors is that the launch has supposedly been pushed back to late 2014.

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On a different note, there has been much criticism of CEO Tim Cook. It’s obviously going to be difficult for someone to come in and replace Steve Jobs. However, according to Glassdoor.com, a very impressive 93 percent of Apple employees approve of Cook. It’s always better to listen to insiders than outsiders.

Traffic for a consumer company’s website can offer excellent hints for demand for its products. According to Alexa.com, Apple.com’s traffic has steadily declined over the past six months. Over the past three months, pageviews-per-user has declined 6.36 percent, time-on-site has declined 7 percent, and the bounce rate (only one pageview per visit) has increased 7 percent. Not so hot at the moment.

With regard to mobile, Apple still owns 46.4 percent of the tablet market, but it’s weak in smartphones.

Pete Cunningham, Canalys Principal Analyst, stated:

“HTC and Samsung have raised the bar with their latest handsets and Apple needs to respond with its next iPhone. The iPhone user interface is now six years old and badly in need of a refresh. Hardware-wise, the biggest dilemma that Apple faces is what it does with the size of the display on the next iPhone. It cannot afford to ignore the trend for larger displays in premium smartphones.”

As far as fundamentals go, they couldn’t be much stronger for Apple. That’s why so many investors have been frustrated with the stock’s performance. What many investors are failing to realize is that it’s not about how the company is performing now; it’s about how the company is expected to perform in the future. In the case of Apple, there has been no innovative product to excite investors (and traders) again. Perhaps that will change late next year. Or possibly even earlier since Apple likes surprises.

The chart below compares fundamentals for Apple, Google (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT).

AAPL GOOG MSFT
Trailing P/E 10.63 26.13 17.68
Forward P/E 10.19 16.43 11.20
Profit Margin 23.46% 20.92% 21.58%
ROE 33.34% 16.36% 22.58%
Operating Cash Flow 55.26B 16.56B 30.61B
Dividend Yield 2.80% N/A 2.60%
Short Position 4.40% 1.50% 1.30%

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

T = Technicals Are Mixed

Apple has disappointed investors over the past year, but there has been some upside momentum over the past month.

1 Month Year-To-Date 1 Year 3 Year
AAPL 10.31% -15.33% -20.32% 87.61%
GOOG 8.13% 23.50% 43.34% 85.07%
MSFT 12.68% 30.16% 21.21% 38.30%

At $445.15, Apple is trading above its 50-day SMA, but still below its 200-day SMA.

50-Day SMA 431.48
200-Day SMA 479.08
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E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Apple is stronger than the industry average of 0.30.

Debt-To-Equity Cash Long-Term Debt
AAPL 0.00 39.14B 0.00
GOOG 0.10 50.10B 7.38B
MSFT 0.19 73.79B 14.76B

E = Earnings Have Been Strong

Look all over the market. You’re not going to find many companies with annual numbers like the ones displayed below.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 32,479 42,905 65,225 108,249 156,508
Diluted EPS ($) 5.36 6.29 15.15 27.68 44.15

Looking at the last quarter on a year-over-year basis, revenue increased and earnings declined. Both revenue and earnings declined on a sequential basis. This has been a rarity for Apple.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 39,186 35,023 35,966 54,512 43,603
Diluted EPS ($) 12.30 9.32 8.67 13.81 10.09

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

Conclusion

Apple is one of the strongest brands in the world. With quality leadership and an enormous amount of cash available, it should only be a matter of time before the stock begins to please investors. However, the key word in the previous sentence was “should”. The market has been slightly under the weather since Ben Bernanke hinted that he may begin to unwind monetary stimulus later this year. Is this yet another incredible buying opportunity for the market, or have the past few years been a facade and the wheels are about to come off? There are many opinions on both sides, but nobody knows the answer to that question with certainty. The market behaves in strange ways and often in ways the masses don’t expect. The point here is that there are increased risks due to external events. Even if the market continues its ascent, it’s too early for the iWatch excitement.

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For now, Apple is a WAIT AND SEE.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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