2014: The Year Of Apple

| About: Apple Inc. (AAPL)

Farewell 2013, it has been nice knowing you. With just a couple of days left for this calendar year, it's time to look ahead to 2014. It might seem rather obvious to choose the largest name in the US as the name to watch in the new year, but 2014 is the year for Apple (NASDAQ:AAPL). 2013 was definitely a transitional year, which set up the technology giant for good things to come in 2014. Today, it's time to examine why 2014 will be an Apple-dominated year, more so than you might think.

My thoughts on the China Mobile (NYSE:CHL) deal:

It's been about a week now since we got the news we've been waiting for. Apple and China Mobile finally agreed to a deal. Pre-registrations have already started, and phones will be available starting January 17th. Analyst estimates are very wide ranging, from 10 million to 24 million first year sales. Most expect a China Mobile deal to boost EPS by $2 to $4 in this first year.

My first key takeaway is that this deal was partially priced in to Apple's stock, which I stated a couple of weeks ago. When Goldman Sachs first said a deal was imminent, Apple shares were under $520. Then shares rallied about $50, dipped back down when no deal was announced at China Mobile's December 18th event, and rallied back once a deal was completed. Apple now stands around $560, still up more than $40 since the Goldman news.

The second key item I discussed was rising analyst estimates. With many believing Apple would start selling to China Mobile on December 18th, estimates were rising. A start date then would have given Apple about 10 sales days in the fiscal first quarter. However, those sales won't start for another month, which is actually three weeks into Apple's fiscal second quarter. So the initial sales rush will be in fiscal Q2, but those sales will only be in place for about 3/4 of Apple's quarter. The first full quarter for China Mobile sales will be Apple's fiscal third quarter, which ends in June. That's probably why Q1 estimates have stopped rising, since Apple will not recognize any China Mobile sales in fiscal Q1. Apple's Q1 estimates over time are seen in the table below, with the yellow line being the day Apple reported fiscal Q4.

As I mentioned above, you also have to model out about 3 weeks of sales in fiscal Q2 if you believed Apple-China Mobile sales would start in December. I'm guessing that Apple will announce earnings the week after the China Mobile deal starts, so expect an announcement from Apple that Monday on how the opening weekend sales were. That potentially sets up Apple earnings for that Wednesday, the 22nd. Should both of those events happen as I outlined, analyst estimates will move quickly into earnings. The following table shows how Q2 estimates have changed in recent weeks.

Fiscal Q2 estimates are rising, as I'm guessing those analysts who did not have a China Mobile deal factored into their models are now starting to adjust. These estimates will probably continue to rise, and I wouldn't be surprised if they are over $46 billion and $11.00 respectively by the time Apple reports fiscal Q1.

More new and exciting products:

I covered some potential products for Apple's fiscal 2014 already, so I'll keep this section brief, especially since most people know what to look for from Apple. Obviously, everyone is looking to see if Apple launches a smart watch, and potentially a TV as well. But the other items to look for are larger screen iPhones and iPads. Many Apple critics are calling for a larger iPhone, and Apple may launch a bigger one in 2014. As for the tablet space, Apple will look to continue its dominance. However, the potential for a Google (NASDAQ:GOOG) Nexus 7 model to feature Intel (NASDAQ:INTC) processors could make things interesting going forward for all tablets. Intel is trying to break into the tablet space in 2014, reducing the ARM Holdings (NASDAQ:ARMH) stranglehold.

Between the China Mobile deal, potential new products, and some help from the buyback, Apple analysts are expecting good things. Current estimates call for 8% revenue growth in fiscal 2014, a rise of more than $13.5 billion to $184.57 billion. Earnings per share are expected to rebound to $43.71 from the $39.75 figure reached in fiscal 2013. A history of Apple's fiscal 2014 estimates is found below, with yellow lines representing earnings dates.

Apple's fiscal year earnings record is $44.15, but that was a 53-week period. If you normalize the number for the extra week, the company's record is $43.16. It will be interesting to see if Apple sets a net income record, because the buyback has really lowered the share count. That higher earnings per share figure was achieved with a much larger share count, so net income was a bit more. With a China Mobile deal now in place, you saw above how analyst estimates are on the rise. I expect a continued rise in estimates into Apple's report in mid to late January. After the earnings report, estimates will change based on Q1 results and Q2 guidance.

A change in the capital return plan:

Carl Icahn is arguing for a $150 billion buyback from Apple, and $50 billion in fiscal 2014 (ending September). I have disagreed with this statement at present, but that depends on how you look at it. Apple could announce a buyback of that size, but the key is timing. Icahn probably wants a $150 billion buyback to be completed in the next year or two. Apple could increase the buyback to $150 billion, but say it won't be done for 5 years. Microsoft (NASDAQ:MSFT) and Cisco Systems (NASDAQ:CSCO) have both announced new buybacks lately, but with no set time dates for completion. More often than not, it's not necessarily the size of the buyback that's most important, but the timing of the buyback and associated rate per quarter. A $100 billion buyback executed over 10 years ($10 billion per year, $2.5 billion per quarter) is much different than a $100 billion buyback executed over 5 years ($20 billion per year, $5 billion per quarter).

The other capital return item investors care plenty about is the dividend. Apple increased its dividend from $2.65 per quarter to $3.05 per quarter during 2013. As of Friday's close, Apple's dividend yielded 2.18% on an annual basis. The dividend yield was obviously much higher when Apple traded at $500 and lower. Apple has lowered its share count by about 5% so far with the buyback, and that will help the dividend going forward. I would expect Apple's next dividend raise to be up to around $3.50 per quarter. That would put the yield back to 2.50% based on Friday's close. I don't see Apple having a $20 or $25 annual dividend like some others think anytime soon. For now, I think Apple is more concerned with the buyback and getting the share count down. Apple will eventually slow down the buyback rate, at which point the dividend will be increased quite nicely.

Apple's CEO Tim Cook stated that any changes to the capital return plan would be announced in early 2014. Investors are always expecting something from Apple, but just remember what I've brought up a lot in the past. Most of Apple's cash is located outside the US. If you are looking for a significant raise to the dividend or the buyback to speed up, Apple will most likely need to take out more debt. Apple is not going to repatriate foreign funds and pay a huge tax bill, and neither are other companies right now. During 2014, I would be looking for a quarterly dividend raise to $3.50, and the buyback to be increased to $100 billion, but an extension of 2-3 years. Remember, Apple's current buyback is expected to be completed by the end of calendar 2015.

Current comparisons and valuations:

One of the main reasons Apple is rated a strong buy by many is that the valuation is very reasonable for the growth profile you are getting, plus the dividend and buyback. The median analyst price target is $600. The table below shows some fiscal year comparisons between the top tier tech names.

*EPS Growth and P/E numbers are non-GAAP.

When you convert Cisco's earnings to GAAP, Cisco trades at a little over 12 times expected earnings for the fiscal year. However, Cisco is having a really bad year, so would you rather own Apple or Cisco? I don't think that one is even worth discussing.

So that gets us to Apple versus Intel and Microsoft. Apple trades at a discount to both, and a fairly significant discount when compared to Microsoft. Does this make sense to you? Well, the only thing you can say about Microsoft is that Bing and Xbox are contributing steep losses. If Microsoft's next CEO decides to dump those two units, Microsoft's earnings could jump, with some estimates having them rise by 30% or more. That would significantly push Microsoft's P/E down. On the Intel side, Intel bulls are expecting a turnaround year in 2014. However, 2012 and 2013 were supposed to be good for the chip giant, and both turned out to be disappointments.

The key here is that Apple looks cheap when compared to its peers, and this is after a nearly $200 rally in Apple shares. Apple still provides a solid amount of growth, which will be helped by the China Mobile deal. Some new products could also boost the company's top and bottom lines. Additionally, a 2.18% annual dividend plus a very powerful buyback make Apple the best all-around package in large cap technology.

Final thoughts:

2014 is setup to be the year of Apple. The year will start off with the start of a deal with China Mobile. Probably just days later, Apple will report Q1 earnings and provide guidance into Q2. This could be the first look into how sales with the Chinese telecom giant are faring, with the next test being the Q2 report in April. Apple investors will also look for an update on the company's capital return plan in the first half of the year. As 2014 progresses, we will watch to see if Apple launches any new products, such as a smartwatch, a TV, or larger phones or tablets. The back half of the year will be dominated by any product launches and earnings reports that will show how those products are selling.

It might seem rather easy to pick Apple as the top stock to watch in 2014, but Apple does have a lot going for it. There isn't another large cap tech name right now whose analyst estimates are rising by the week. Apple is likely to set new revenue records in each quarter of its fiscal year, with the potential for EPS records in those quarters as well. The fact that Apple trades at such a reasonable valuation only makes this story even more interesting. 2013 is about to end, which means 2014 is about to start. 2014 will be the year of Apple.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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