Apple: Different Quarter, Same Prognosis

Mar.26.14 | About: Apple Inc. (AAPL)


Apple has been stuck in a fairly narrow trading range in the first quarter of trading of 2014.

The stock still has a compelling valuation and possible second quarter catalysts.

Below is an analysis of those catalysts and a prognosis for second quarter performance.

"Sorrow and silence are strong, and patient endurance is godlike." - Henry Wadsworth Longfellow

It has been a while since I penned anything on Apple (NASDAQ:AAPL). The stock has been about as exciting as watching paint dry recently. As I predicted in a February article on the tech giant from Cupertino, the stock is stuck in a trading range that has been in place throughout the quarter.

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So what are the prospects for the equity in the second quarter? Let's take a look.


Apple's compelling valuation remains intact as it is right in the middle of the trading range ($500 to $570 a share) I outlined a month ago. The S&P is going for approximately 16x forward earnings with expectations for 4% revenue growth in 2014. Apple is priced at just over 12.5x this year's consensus earnings, a 20% discount to the overall market multiple. Sales are also expected to grow in the 5% to 7% range in 2014, better than the overall S&P 500.

This valuation does not take into account Apple's over $150B in net cash & marketable securities. Taken that into account and Apple is selling for less than 9x forward earnings, a 40% discount to the overall market multiple. The stock also yields 2.3% and the company will most likely announce another dividend boost by the end of the year.


I also believe the bottom of the trading range of $500 a share remains in place. This is the approximate level the company bought some $12B of its own stock after the shares suffered a ~8% drop post earnings. Apple still has plenty of "dry powder" and this level seems like one where the company would again be active in purchasing shares if it dropped near $500 a share again.


So what catalysts will power the stock higher in the second quarter? Obviously, Apple's next quarterly results delivered during the week of April 21st will be heavily scrutinized. The current consensus is calling for just over $10 a share in earnings on just north of $43B in revenue. Investors will be looking to see if margins hold up in the quarter and how new distribution deals are powering iPhone sales in China and Japan. I expect results to come in near consensus and I don't believe these results will move the stock much one way or another.

I could see an announcement in the second quarter that the company is boosting its stock repurchase program. The company has already spent some ~$40B of the $60B authorized last summer. This would be a mild positive depending on the size of the boost.

Apple could also announce some sort of wearable technology product that has been long awaited. This would help the company against the argument it does not innovate anymore, but will not be significant as far as earnings or revenue growth in my opinion. I think the rumors of a streaming TV service between Apple and Comcast (CMSCA) are just a pipe dream at the moment as the sides seem far apart according to reports.

The main catalyst for Apple this year will be the announcement and launch of the iPhone 6 which should have the larger screens investors and customers have been clamoring for. Unfortunately, I do not see this announcement officially happening until the third quarter, although there will be many rumors on the new version of the iPhone in the second quarter.


Unfortunately for Apple shareholders, I see the stock stuck in the same trading range as in the first quarter. I plan to sell just out of the money puts on Apple anytime the stock approaches the lower end of its trading range in the second quarter to pick up premium income. I also think the stock could easily outperform the overall market due to its valuation, dividend and stability as I expect the overall market to continue to face increasing volatility in the second quarter. A sell-off in the quarter is not out of the question.

The good news for patient Apple equity holders is that third quarter prospects should be much brighter as the iPhone 6 is announced. Apple stock rose more than 20% in the third quarter of 2013 on the back of the iPhone 5C/5S announcement and launch. I would not be surprised if this trend repeats and the third quarter provides the bulk of Apple's gains in 2014. Patience is the watchword for the second quarter.

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.