There's one company that's very vulnerable to rising interest rates. And that is Apple (AAPL). While Cupertino has built up a cash fortress, the money is not well-placed to withstand lower bond prices.
In April, the Bank of Apple reported a mountain of money: $145 billion spread out, in cash ($12 billion), short-term marketable securities ($27 billion), and long-term securities ($106 billion). It is the long-term securities I want to call your attention to. Here's the break-down as noted in Apple's most recent 10Q:
As you can see, a massive $106 billion is invested primarily in long-term U.S., municipal, corporate, and mortgage-backed bonds. For years, Apple secured the bulk of its cash hoard in shorter-term investments. I always thought that was because Steve Jobs couldn't bring himself to take any risk with Apple's money and nixed the added risk of longer duration securities. It wasn't until 2010 that Apple piled into long-term securities, a move that has been paying off as those securities appreciated in value.
And now, unfortunately for Apple, that $106 billion may be not worth as much as it was on March 31. Long-term Treasuries, corporates, and munis have been declining in value on concerns that the Federal Reserve may soon wind down its bond buying.
The rock-solid $106 billion may not be so rock-solid anymore. In fact, Apple's assets may be particularly vulnerable to further bond declines.
According to analyst consensus, next quarter earnings are expected to drop 13% y/y. Investors may be prepared for that. No one is expecting an erosion in the value of Apple's cash position. Yet, this July when Apple reports, we may get a hint of bond losses. And if you believe as I do that long-term rate increases are just beginning, then steel yourself for multi-billion dollar losses in Apple's long-term security position as rates climb.
Apple could get caught in a pincer attack: While Samsung (SSNLF.PK) and HTC (HTCCY.OB) attack Apple's P&L, rising interest rates just might assault its balance sheet. The huge percentage of cash invested in longer-term securities may come back to haunt Apple sooner than later.
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