Apple: All Systems Go For 2014

| About: Apple Inc. (AAPL)

As we get ready to close the books on 2013, it is time to take a quick look at back at one of the stocks that has not participated in the huge rally in equities this year. That stock is tech giant Apple (NASDAQ:AAPL). Investors who have been in the rainforest of Borneo or stranded on a deserted island for the past year might look at the current level of $550 a share and think the stock had an uneventful year given the shares are exactly where they were to start the year.

However, as one can see from the chart below, the year has been anything but uneventful.

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The shares spent the first half of the year continuing their decline that began in Mid-September 2012 at over $700 a share. Driven by better capital allocation decisions for its ~$140B cash hoard (increased dividend payout and accelerated share buybacks) and successful launches of new versions of the iPhone & iPad, the stock has been on fire in the second half of the year fully recovering from its deep pullback in the first six months of the year.

So what's ahead for 2014?

I believe the stock is set up to be an outperformer in 2014 as the shares catch up to the rally the overall market has had in 2013. I can also see some of the multiple expansions that have driven the majority of the gains in the market this year being bestowed on Apple in the coming year.

There are myriad reasons I have this opinion on Apple, among the top three are the following:

The China Mobile Deal:

Yes, I know ... .waiting for the "official" signing of this deal is like being a kid on Christmas Eve waiting for Santa. Time seems to be standing still waiting for this huge transaction to be announced. This deal would be a major catalyst for the stock in 2014. China Mobile (NYSE:CHL) is the largest carrier in the world with over 700mm subscribers and should boost earnings between $2 a share to $4 a share in 2014 according to analysts.

There are numerous solid reasons to believe this is a done deal early in 2014:

  • Apple has already told its main manufacturer in China to add China Mobile to its approved vendor list.
  • China has recently issued 4G licenses to China Mobile, which is a precursor to being able to offer the iPhone on its network.
  • China Mobile has already begun taking preorders for the new iPhones on its website and selling unsubsidized iPhones at some of its branches.

Although investors have a right to be frustrated that this long awaited deal was not announced on December 18th as speculated at China Mobile's 4G Partners conference, all signs still point to a deal in place by the first quarter of 2014.

Improving Margins/Earnings:

Driven by the launches of new versions of its iconic iPhone and iPad franchisees, earnings should show year over year gains in 2014. This is critical to sentiment and momentum for the stock. Earnings fell year over year in every quarter of 2013 which was one of the critical factors driving the stock's decline in the first half of 2013.

Consensus earnings estimates for the next reported quarter have moved from $13.55 a share to $14.03 a share over the past three months. If earnings come in as expected, this will be the first year over year gain in quarterly earnings since 4Q2012. In addition, the new launches should arrest the year long decline in operating margins Apple has seen over the past year.

Capital Allocation/Technicals:

The company is currently returning almost $10B a quarter to investors via stock repurchases and dividend payouts. Carl Icahn is pushing the company to raise its stock repurchase program by another $50B. I don't think Mr. Icahn will fully get his wishes. However, I believe investors can look forward to another dividend hike and some sort of additional increase in the company's stock repurchase program sometime in 2014. In addition, the stock's technicals look extremely strong right now.

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Apple basically broke even in 2013 even as the overall market was up over 25%. I think 2014 will be a "catch up" year. The stock sells for ~9x forward earnings once Apple's huge cash holdings are taken out of the equation. Without equating for cash, AAPL sells at 11.5x forward earnings and yields 2.3%. The current overall market is currently just over 15x forward earnings. I look for Apple to make up a good portion of that discount in 2014 and I look for the shares to return a 15% to 25% overall return in 2014. BUY

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