Apple: It's Not About Icahn, It's About Growth

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 |  About: Apple Inc. (AAPL)
by: Brian Gilmartin, CFA

On Wednesday, CNBC and the Twitter (NYSE:TWTR) feed were all abuzz about the latest utterance from Carl Icahn about Apple' s (NASDAQ:AAPL) cash position, and when and if Tim Cook and the management team plan on returning any excess capital to shareholders in the near future.

It was my understanding that Tim Cook said he (and presumably the Board) would address the issue of Icahn and the buyback in January '14, around the time of earnings.

Our suggestion for readers is, while a shareholder activist is important in shareholder value creation, pay more attention to AAPL's growth prospects and the trend in EPS and revenue estimates, than the headlines around Uncle Carl.

In this October 1, 2013 article written for Seeking Alpha, we thought and still think the problem or challenge for Apple is earnings and revenue growth, although we are happy to report that with the October '13 earnings report, EPS and revenue estimates have started to turn higher for forward estimates.

 

 

eps growth - act and est                
2016 - estimated   3% -23% -3% -13% 10%    
2015 - estimated   10% 3% 12% 11% 12% 11%  
2014 - estimated   9% 9% 10% 14% 17% 14% 15%
2013 - actual   -10% -11% -8% 2% 14% 19% 16%
2012 - actual   60% 60% 60% 60% 60% 60% 69%
2011 - actual   83% 83% 83% 83% 83% 83% 83%
2010 - actual   67% 67% 67% 67% 67% 67% 67%
2009 - actual   34% 34% 34% 34% 34% 34% 34%
2008 - actual   73% 73% 73% 73% 73% 73% 73%
2007 - actual                
2006 - actual                
2005 - actual                
2004 - actual                
2003 - actual                
2002 - actual                
2001 - actual                
2000 - actual                
1999 - actual                
                 
2016 eps estimated (sept '16) $48.81 $48.81 $34.01 $49.18 $49.18 $73.00    
  $10.58 $10.58            
  $11.16 $11.16            
  $12.76 $12.76            
  $15.85 $15.85            
  9 9 3 4 4 1    
                 
2015 eps estimated (sept '15) $47.40 $47.40 $43.90 $50.45 $56.64 $66.07 $66.07  
  $10.79 $10.79 $11.99 $13.60 $14.68 $18.44    
  $10.18 $10.18 $10.33 $11.61 $13.67 $16.66    
  $12.14 $12.14 $11.56 $12.48 $14.74 $17.68    
  $15.59 $15.59 $14.99 $15.13 $17.23 $20.00    
  41 41 22 20 16 9 3  
                 
2014 eps estimated (sept '14) $43.25 $43.25 $42.56 $44.91 $51.08 $58.75 $59.76 $62.16
  $9.69 $9.69 $9.62 $10.33 $11.92 $13.92 $13.98 $14.65
  $8.93 $8.93 $8.95 $9.22 $11.38 $13.45 $13.28 $13.60
  $10.74 $10.74 $10.47 $10.77 $12.07 $14.37 $13.84 $13.94
  $13.93 $13.93 $13.46 $13.96 $15.11 $16.55 $16.63 $17.26
  54 54 56 54 49 39 20 18
                 
2013 eps actual (Sept '13) $39.75 $39.75 $39.12 $40.67 $44.93 $50.40 $52.53 $54.21
q4 '13 eps - actual $8.26 $8.26 $7.69 $8.57 $10.71 $11.83 $11.85 $12.95
q3 '13 eps - actual $7.47 $7.47 $7.47 $7.63 $9.88 $11.60 $12.00 $12.57
q2 '13 eps - actual $10.01 $10.01 $10.01 $10.01 $10.37 $12.51 $12.97 $12.98
q1 '13 eps - actual $13.81 $13.81 $13.81 $13.81 $13.81 $13.58 $15.26 $15.54
  57 57 57 57 56 56 51 51
                 
2012 eps - actual (Sept '12) $44.15 $44.15 $44.15 $44.15 $44.15 $44.15 $44.31 $46.84
q4 '12 eps - actual $8.67 $8.67 $8.67 $8.67 $8.67 $8.67 $8.57 $10.32
q3 '12 eps - actual $9.32 $9.32 $9.32 $9.32 $9.32 $9.32 $9.32 $10.34
q2 '12 eps - actual $12.30 $12.30 $12.30 $12.30 $12.30 $12.30 $12.30 $12.30
q1 '12 eps - actual $13.87 $13.87 $13.87 $13.87 $13.87 $13.87 $13.87 $13.87
  50 50 50 50 50 50 50 50
                 
2011 eps - actual $27.68 $27.68 $27.68 $27.68 $27.68 $27.68 $27.68 $27.68
q4 '11 eps - actual $7.05 $7.05 $7.05 $7.05 $7.05 $7.05 $7.05 $7.05
q3 '11 eps - actual $7.79 $7.79 $7.79 $7.79 $7.79 $7.79 $7.79 $7.79
q2 '11 eps - actual $6.40 $6.40 $6.40 $6.40 $6.40 $6.40 $6.40 $6.40
q1 '11 eps - actual $6.43 $6.43 $6.43 $6.43 $6.43 $6.43 $6.43 $6.43
  54 54 54 54 54 54 54 54
                 
2010 eps - actual $15.15 $15.15 $15.15 $15.15 $15.15 $15.15 $15.15 $15.15
q4 '10 eps - actual                
q3 '10 eps - actual                
q2 '10 eps - actual                
q1 '10 eps - actual                
                 
                 
2009 eps - actual $9.08 $9.08 $9.08 $9.08 $9.08 $9.08 $9.08 $9.08
q4 '09 eps - actual                
q3 '09 eps - actual                
q2 '09 eps - actual                
q1 '09 eps - actual                
                 
2008 eps - actual $6.78 $6.78 $6.78 $6.78 $6.78 $6.78 $6.78 $6.78
q4 '08 eps - actual                
q3 '08 eps - actual                
q2 '08 eps - actual                
q1 '08 eps - actual                
                 
                 
2007 eps - actual $3.93 $3.93 $3.93 $3.93 $3.93 $3.93 $3.93 $3.93
Click to enlarge

Here is our EPS history as we track every quarter for AAPL and as you can see the forward quarters for the next three years shows high-single-digit, to low double-digit growth.

Obviously the forward rate of growth is substantially slower from 2007 - 2012.

However unlike the period from September, 2012 through October, 2013, EPS estimates have now turned higher again.

Here is our table of AAPL's revenue history, both absolute dollars and the historical and expected growth:

 

 

Revenue growth                
2016 - revenues estimated   6% -7% -2% -9% 9%    
2015 revenues - estimated   6% 3% 11% 14% 16% 18%  
2014 revenues - estimated   7% 7% 10% 13% 15% 14% 15%
2013 revenues - actual   9% 8% 11% 17% 23% 23% 21%
2012 revenues - actual   44% 44% 44% 44% 44% 44% 49%
2011 revenues - actual   66% 66% 66% 66% 66% 66% 66%
2010 revenues - actual   52% 52% 52% 52% 52% 52% 52%
2009 revenues - actual   14% 14% 14% 14% 14% 14% 14%
2008 revenues - actual   56% 56% 56% 56% 56% 56% 56%
2007 - actual                
2006 - actual                
2005 - actual                
2004 - actual                
2003 - actual                
2002 - actual                
2001 - actual                
2000 - actual                
                 
2016 revenues - estimated   $206,289 $173,208 $207,730 $214,363 $280,147    
    8 5 6 5 2    
                 
2015 revenues - estimated   $195,119 $187,091 $212,204 $235,731 $257,403 $257,403  
    $44,809 $50,872 $55,108 $61,502 $72,455    
    $42,614 $44,347 $48,058 $56,660 $64,818    
    $48,716 $48,414 $50,282 $59,267 $66,670    
    $60,658 $59,613 $61,302 $69,366 $72,581    
    38 21 20 15 10 4  
                 
2014 revenues - estimated   $183,396 $181,119 $191,361 $207,686 $222,730 $218,891 $225,529
    $41,352 $41,735 $45,183 $50,063 $53,483 $53,247 $56,030
    $39,436 $39,477 $41,580 $47,351 $51,551 $49,887 $51,393
    $45,301 $44,330 $45,860 $48,968 $53,376 $50,184 $51,117
    $57,025 $55,050 $56,724 $59,217 $61,576 $60,146 $62,057
    51 51 51 47 38 20 19
                 
2013 revenues - actual $170,910 $170,910 $169,693 $173,512 $183,394 $193,090 $191,669 $196,202
q4 '13 revenues - actual $37,472 $37,472 $36,125 $38,836 $43,940 $45,685 $45,385 $47,787
q3 '13 revenues - actual $35,323 $35,323 $35,323 $35,725 $41,224 $44,792 $44,972 $46,197
q2 '13 revenues - actual $43,180 $43,180 $43,180 $43,180 $43,180 $47,573 $46,605 $46,225
q1 '13 revenues - actual $54,512 $54,512 $54,512 $54,512 $54,512 $54,467 $54,636 $54,648
  52 52 52 52   53 48 48
                 
2012 revenues - actual $156,508 $156,508 $156,508 $156,508 $156,508 $156,508 $156,281 $161,703
q4 '12 revenues - actual $35,966 $35,966 $35,966 $35,966 $35,966 $35,966 $35,214 $38,452
q3 '12 revenues - actual $35,023 $35,023 $35,023 $35,023 $35,023 $35,023 $35,023 $37,368
q2 '12 revenues - actual $39,186 $39,186 $39,186 $39,186 $39,186 $39,186 $39,186 $39,186
q1 '12 revenues - actual $46,333 $46,333 $46,333 $46,333 $46,333 $46,333 $46,333 $46,333
  48 48 48 48 48 48 48 48
                 
2011 revenues - estimated $108,429 $108,429 $108,429 $108,429 $108,429 $108,429 $108,429 $108,429
q4 '11 revs - actual $28,270 $28,270 $28,270 $28,270 $28,270 $28,270 $28,270 $28,270
q3 '11 revs - actual $28,571 $28,571 $28,571 $28,571 $28,571 $28,571 $28,571 $28,571
q2 '11 revs - actual $24,667 $24,667 $24,667 $24,667 $24,667 $24,667 $24,667 $24,667
q1 '11 revs - actual $26,741 $26,741 $26,741 $26,741 $26,741 $26,741 $26,741 $26,741
  51 51 51 51 51 51 51 51
                 
2010 revenues - actual $65,225 $65,225 $65,225 $65,225 $65,225 $65,225 $65,225 $65,225
q4 '10 revenues - actual                
q3 '10 revenues - actual                
q2 '10 revenues - actual                
q1 '10 revenues - actual                
                 
                 
2009 revenues - actual $42,905 $42,905 $42,905 $42,905 $42,905 $42,905 $42,905 $42,905
q4 '09 rev's actual                
q3 '09 rev's - actual                
q2 '09 rev's - actual                
q1 '09 revs - actual                
                 
                 
2008 revenues - actual $37,491 $37,491 $37,491 $37,491 $37,491 $37,491 $37,491 $37,491
q4 '08 revenues - actual                
q3 '08 revenues - actual                
q2 '08 revenues - actual                
q1 '08 revenues - actual                
                 
                 
2007 revenue estimate $24,006 $24,006 $24,006 $24,006 $24,006 $24,006 $24,006 $24,006
Click to enlarge

At 12(x) and 11(x) fiscal 2014 and 2015 earnings, and with AAPL trading at 7(x) cash-flow (ex cash) and 8(x) free-cash-flow (ex-cash), AAPL is pretty cheap, but the next catalyst is going to have to drive upward revisions in revenues, which are then likely to drive more revisions in EPS.

My own opinion is that the Carl Icahn news is already incorporated into analyst 2014 EPS estimates.

To be perfectly upfront with readers, while we've owned the stock for years, and have nice gains in client accounts we didn't pick the best level to trim positions in 2013, although that hasn't hurt us that much since the stock is up just 6% year-to-date, versus the SP 500's +27% return.

Our intrinsic value model, puts a fair value on AAPL of $530, while Morningstar values the stock at an intrinsic value of $600.

Events like Apple getting on China Mobile as a carrier or the AAPL TV might move the needle in terms of revenues and earnings, but with a $508 billion market cap, makes it a harder and harder effort.

Some CNBC pundits have talked about AAPL becoming the first trillion $ market cap company in the history of the stock market, which given that the US economy is $15 - $16 trillion in size, would mean that AAPL would represent 6.5% of the entire US economy.

As it stands today, with a $508 billion market cap, and assuming a $15.5 trillion US economy means that AAPL at its current market represents 3.3% of the entire US economy. (Here is our source on the dollar value of GDP data, i.e. the World Bank.)

I'm not saying that AAPL can't grow at 15% per year again, it is just getting harder and harder to do so.

(After we submitted the article to the SeekingAlpha editors, AAPL and China Mobile, (kinda, sorta) announced a deal which isn't yet official. The CHL deal could amount to an additional $4 in EPS to AAPL earnings in 2014, per one analyst depending on the terms of the agreement. Although it is growth, the CHL deal might be just 10% "incremental" growth, which although a positive will not send AAPL back to the annual returns the stock saw before September '12.)

Size matters.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.