Poison Apple
Is there a poison apple in your portfolio? You may not think so, but I would not own the shares of this seemingly juicy fruit, despite solid earnings momentum and a valuation I view inexpensive relative to growth.
The shares of Apple Inc. (AAPL) rose 1.1% on Friday, after climbing 3.7% Thursday, the day after the company posted stellar quarterly revenue and earnings growth. Revenues climbed 21% in the company's fiscal second quarter ended in March, boosted by expanding sales into Europe. Apple's top line was driven by 36% growth in Mac shipments and a 24% increase in iPod sales. Earnings per share soared 85%, as gross margin widened by 500 basis points to 35.1%. However, the company's guidance for the fiscal third quarter did not excite, with revenues seen approximating $5.1 billion and EPS $0.66, a penny short of the consensus view compiled by Thomson Financial. AAPL's iPhone launch isn't expected until June, and thus, will not impact the coming quarter in a meaningful way, according to Apple.
Earnings for the quarter of $0.87 far exceeded the analysts' consensus view for $0.64, and analysts generally viewed Apple's Q3 guidance as conservative rather than foreboding. If we adjust the estimate for the fiscal year ended September '07, which is just six months off, upward for this quarter's rise and subtract a penny for Apple's lower Q3 guidance, earnings for FY 07 should reach $3.47. This looks understated to us, but let's work with a conservative figure. AAPL closed at roughly $99.92 on Friday, giving the shares a P/E of 28.8 on the estimate six months forward. The consensus growth estimate for the next five years is 20%, again likely understated. So, a conservatively estimated PEG ratio on this data measures 1.44, not bad considering the fractional time period to realize the earnings.
Now, let me tell you why I wouldn't own the shares despite a valuation I would normally consider decent for a high growth firm with such positive momentum. This here apple is poisoned. I saw an analyst interviewed on CNBC after the earnings report and he was very positive on the company. However, when asked about the risk related to the options pricing question, and the possibility that Steve Jobs could be implicated, he brushed it off like a non-issue. Here's the problem, it isn't! Any sensible analyst must measure and know what risk lies in an event that is clearly possible. It's called scenario analysis and event risk. It should play into AAPL's valuation at all times, but at a discount for the possibility that it will not occur and incorporating the time frame of possibility. I saw another analyst interviewed and asked how he felt about the valuation after the shares were up so much in after hours trading, and he said, "well I would have to go back and update my model first." I can sympathize a bit, but his answer just highlighted the poor guy's inability to see the forest for the trees, unfortunately a common problem among overburdened analysts. I saw it time and again in my time working for an independent equity research provider that asked their analysts to follow 30-40 stocks without an assistant. Most analysts on the sell-side follow 12 to 15 names with an assistant, so a great deal of personal sacrifice is necessary to do the job right, and considering the lower pay scale at this firm, that was a tough choice. However, it was one I made every night as I turned the office lights off, while my supervisors slept peacefully at home.
If the CEO of Apple were anybody but Steve Jobs, I believe the valuation would be impacted in a more meaningful way and the Board of Directors would not be issuing a vote of support, but pressuring the CEO to announce his resignation. Apple's CFO during the time of the decision to price the options stated that he informed Jobs of the economic impact of the decision. It seems to us like Jobs has claimed ignorance to the issue, which by the way, is not a viable defense for a crime last I checked. It also seems clear to us that the CFO had an important stake in making the statement, but that doesn't necessarily make it false.
Steve Jobs is an iconic leader, and clearly a man who will be recognized in history for his contributions to society. For this reason, everybody wants to find him innocent, but is that fair to the individuals found guilty for similar decisions? Now, at this point, it would be a bit presumptuous and even irresponsible to assume guilt or innocence. That decision will be up to the SEC and potentially other parties. The thing is, the SEC is an objective judge, and I anticipate there is a decent chance that its future actions and possibly later decision could be a negative catalyst to AAPL shares. Besides, Jobs is a big fish, and one that, if caught, would send a message across the spectrum of American industry.
If Jobs is found guilty of a crime, I believe the shares are not pricing that risk in appropriately, and that's a subjective read on my part. For a more scientific value assignment to this risk, we would have to compile a large group of similar situations and compare valuations of subject companies to like peers. That discount we assume exists would then be applied to Apple's stock, and we would compare that value with the stock's current price. My subjective estimate is that AAPL is not properly discounted for this, but the event risk is that Jobs is found guilty, and that potential news would price in the full value of losing such an important visionary, a critical asset.
So, why own this stock when a world of others exists, especially if the risk is understated. If understated, we cannot benefit properly from mispricing when the situation passes, if we expect it to pass calmly. I respect Steve Jobs, but I would not own Apple shares today. I would look to unload the stock as volume resulting from the earnings news fades. With this issue overhanging, it should not take long for that to happen, and momentum chasers might even drive the shares lower on strong volume before it can. In any event, I would not hold Apple now, and if I miss a great gain that's only because I couldn't find it in another stock, in my view.
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The shares of Apple Inc. (AAPL) rose 1.1% on Friday, after climbing 3.7% Thursday, the day after the company posted stellar quarterly revenue and earnings growth. Revenues climbed 21% in the company's fiscal second quarter ended in March, boosted by expanding sales into Europe. Apple's top line was driven by 36% growth in Mac shipments and a 24% increase in iPod sales. Earnings per share soared 85%, as gross margin widened by 500 basis points to 35.1%. However, the company's guidance for the fiscal third quarter did not excite, with revenues seen approximating $5.1 billion and EPS $0.66, a penny short of the consensus view compiled by Thomson Financial. AAPL's iPhone launch isn't expected until June, and thus, will not impact the coming quarter in a meaningful way, according to Apple.
Earnings for the quarter of $0.87 far exceeded the analysts' consensus view for $0.64, and analysts generally viewed Apple's Q3 guidance as conservative rather than foreboding. If we adjust the estimate for the fiscal year ended September '07, which is just six months off, upward for this quarter's rise and subtract a penny for Apple's lower Q3 guidance, earnings for FY 07 should reach $3.47. This looks understated to us, but let's work with a conservative figure. AAPL closed at roughly $99.92 on Friday, giving the shares a P/E of 28.8 on the estimate six months forward. The consensus growth estimate for the next five years is 20%, again likely understated. So, a conservatively estimated PEG ratio on this data measures 1.44, not bad considering the fractional time period to realize the earnings.
Now, let me tell you why I wouldn't own the shares despite a valuation I would normally consider decent for a high growth firm with such positive momentum. This here apple is poisoned. I saw an analyst interviewed on CNBC after the earnings report and he was very positive on the company. However, when asked about the risk related to the options pricing question, and the possibility that Steve Jobs could be implicated, he brushed it off like a non-issue. Here's the problem, it isn't! Any sensible analyst must measure and know what risk lies in an event that is clearly possible. It's called scenario analysis and event risk. It should play into AAPL's valuation at all times, but at a discount for the possibility that it will not occur and incorporating the time frame of possibility. I saw another analyst interviewed and asked how he felt about the valuation after the shares were up so much in after hours trading, and he said, "well I would have to go back and update my model first." I can sympathize a bit, but his answer just highlighted the poor guy's inability to see the forest for the trees, unfortunately a common problem among overburdened analysts. I saw it time and again in my time working for an independent equity research provider that asked their analysts to follow 30-40 stocks without an assistant. Most analysts on the sell-side follow 12 to 15 names with an assistant, so a great deal of personal sacrifice is necessary to do the job right, and considering the lower pay scale at this firm, that was a tough choice. However, it was one I made every night as I turned the office lights off, while my supervisors slept peacefully at home.
If the CEO of Apple were anybody but Steve Jobs, I believe the valuation would be impacted in a more meaningful way and the Board of Directors would not be issuing a vote of support, but pressuring the CEO to announce his resignation. Apple's CFO during the time of the decision to price the options stated that he informed Jobs of the economic impact of the decision. It seems to us like Jobs has claimed ignorance to the issue, which by the way, is not a viable defense for a crime last I checked. It also seems clear to us that the CFO had an important stake in making the statement, but that doesn't necessarily make it false.
Steve Jobs is an iconic leader, and clearly a man who will be recognized in history for his contributions to society. For this reason, everybody wants to find him innocent, but is that fair to the individuals found guilty for similar decisions? Now, at this point, it would be a bit presumptuous and even irresponsible to assume guilt or innocence. That decision will be up to the SEC and potentially other parties. The thing is, the SEC is an objective judge, and I anticipate there is a decent chance that its future actions and possibly later decision could be a negative catalyst to AAPL shares. Besides, Jobs is a big fish, and one that, if caught, would send a message across the spectrum of American industry.
If Jobs is found guilty of a crime, I believe the shares are not pricing that risk in appropriately, and that's a subjective read on my part. For a more scientific value assignment to this risk, we would have to compile a large group of similar situations and compare valuations of subject companies to like peers. That discount we assume exists would then be applied to Apple's stock, and we would compare that value with the stock's current price. My subjective estimate is that AAPL is not properly discounted for this, but the event risk is that Jobs is found guilty, and that potential news would price in the full value of losing such an important visionary, a critical asset.
So, why own this stock when a world of others exists, especially if the risk is understated. If understated, we cannot benefit properly from mispricing when the situation passes, if we expect it to pass calmly. I respect Steve Jobs, but I would not own Apple shares today. I would look to unload the stock as volume resulting from the earnings news fades. With this issue overhanging, it should not take long for that to happen, and momentum chasers might even drive the shares lower on strong volume before it can. In any event, I would not hold Apple now, and if I miss a great gain that's only because I couldn't find it in another stock, in my view.
To receive our reports via email, click here and provide us with your email address. We respect your privacy and will never share your information with any third party. (disclosure)
posted by The Greek | 10:11 AM
2 Comments:
Let's be frank, Steve Jobs doesn't understand "money"... never has, never will.
The western idea that "money" is the end goal doesn't resinate with Steve. This concept goes so far that the Board had to "give" him a Jet Plane, he never requested it.
He's 50% Egyptian, not a Western thinker, so I have to laugh at all this "theory" that he is behind the perfectly legal stock transactions.
The SEC probably could take him to court on absurd technicalities, but they'd NEVER win since they have not scant evidence, much less "support" by the people.
Let the grandness of Steve carry on, he is one of the great people of our century. The spreadsheet, the electronic font, the www, the ipod, and now the AppleTV & iPhone... wow, that's Edison territory.
Mellow out people, he is no Ken Lay.
The whole inquiry is he is laying waste to the Microsoft empire, that's the "true" problem... and that will be fixed in 18 months.
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There is not much to say to an article like yours, except if I listened to poison like yours year after year, I would of missed on the run-up that has occured for the past 3 years. You are a joke, just like a number of analysts and media who just don't get this company.
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