Apple- A company to “Nibble” on
Apple is a company on everyone’s mind from hedge funds to analysts, and retail investors alike. Bulls argue that Apple’s ecosystem, brand recognition and huge ability to return capital to shareholders makes it attractive. Bears point to a potential lack of ability to further innovate enough to keep customers paying a premium, its cyclical nature, and the fact that the company is mostly tied to a single phone. We, like major apple owner Warren Buffet, back the bullish view.
The biggest reason why we like apple is it makes mountains of cash. This is a company who makes over 50 billion a year, and last quarter alone had over 70 billion in operating cash flow. This isn’t counting the cash the company has currently, including a grand total of 237 billion, all of which give it a rock solid balance sheet. We think that the prospects for not only innovation, which apple continuously invests in to stay ahead of the pack, mixed with the ability to buy back shares hand over fist is too appealing right now.
This works both ways; if you’re bearish on the economy, apple has a pristine balance sheet and the ability to aggressively buyback even more shares should the prices continue to drop. should the economy continue to chug along with GDP numbers like 2-3%, apple will be making more money than anyone can dream of. it’s also important to consider that even in 2008 apple grew earnings, and in a weaker economy in 2015, earnings shrank only close to 10%. This is also coupled with the fact that recessions on average are very short, usually only around 8 months, meaning that a company like apple will continue to be a money machine.
Holistic business model
Apple’s business model with service revenues and overall ecosystem is one of the best there is. It makes for sticky model that hooks consumers to keep brand loyalty. This is because of the whole iCloud ecosystem offering so much in the way of convince across devices, it leaves little doubt in consumers minds that their next purchase will again be an apple product. This ecosystem offers further opportunities to grow in new ways. Things like self driving cars, healthcare devices, are all on apples radar, and with top class brand recognition and loyalty, this leaves apple some good places to grow their ecosystem further.
Another thing to take in is how Apple is trading. even with its great balance sheet, high margin, sticky Eco-system, at close to 12x earnings. This is a below market multiple closer to the middle of its historical trading range between 10-16x earnings. However Apple now has all that cash at home and the economy in the first 3 quarters being so strong.
Still room for growth
Sure the arguments about how apple will beat the law of large numbers is true, and their growth is slowed and tied to the iPhone but we think fair value is closer to 14x earnings, especially with the ability to artificially inflate earnings with share buybacks. With growth In sales primarily from services, and earnings with the help of buybacks, its perfectly conceivable for apple to grow long term EPS at a 10%+ clip. earnings growth of this magnitude would imply over the long term for apple to generate 10%+ in capital gains with 2% in their always growing dividend. After a substantial correction taking apple lower in the range of earnings historically, gives investors a good entry point to a solid company, looking at the potential to beat the index rather handily. Apples is on our large list of companies that investors should look at to nibble on, no matter what market we are in, for the long haul.