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Summary

  • Apple is shooting higher in trading Thursday on a stellar earning report.
  • In addition to solid earnings the tech giant is increasing its dividend and its stock buyback authorization.
  • Even with its rise today, the shares remain a compelling value and additional positive catalysts should buoy the stock further in the second half of the year.

An investor knows that he is going to have a good trading day when the biggest position in his portfolio is "en fuego" and shooting 7% higher in early trading. I am experiencing this Thursday morning as Apple (NASDAQ:AAPL) delivered superlative earnings results after the bell Wednesday and it announced very impressive & aggressive capital return news.

This surprised me only in so much as I expected that Apple would be a second half story on the back of the release of the iPhone 6. The new phone should have the larger screens investors and customers have been clamoring for. Oh well, nothing wrong with good news arriving early. It is almost like Christmas in July for patient Apple shareholders whose have watched the stock be stuck in a relatively tight trading range in 2014 after its big rise in the second half of 2013.

Let's take a look at the many highlights of Apple's earnings and conference call and then discuss where the stock is going from here.

Earnings Highlights:

It is hard to know where to start given the amount of positives contain in Apple's latest quarterly results:

  • Apple reported earnings of $11.62 a share, $1.44 above consensus. Revenues came in at ~$45.6B, slightly above expectations.
  • The company sold a total of 43.7mm iPhones in the quarter which was above expectations. iPhone revenues rose 17% Y/Y, accelerating from last quarter's 6% Y/Y growth.
  • Mainly as the result of iPhone sales (~57% of total revenues), margins rose to 39.3% an unexpected improvement of 180bps and above the company's guidance of 37% to 38%.
  • Thanks partly to new distribution deals with major overseas carriers, iPhone revenues went up 13% Y/Y in China and an impressive 26% Y/Y in Japan.

On the capital allocation front Apple announced:

  • It would split the stock 7 for 1.
  • The company spent $18B in the month on stock repurchases but still has a ridiculous $150B in net cash and marketable securities on hand despite buying back so much stock in the quarter.
  • Apple also announced this is not the end of high stock buyback activity by raising its stock repurchase authority by $30B.
  • Finally, the firm announced an 8% dividend hike and will make annual dividend hikes part of its mantra going forward.

Outlook:

There is not much not to like about Apple's latest results. However, I think better days lay ahead in the second half of the year. Apple's main smartphone competitor Samsung has gotten lukewarm reviews and initial sale results for its latest Galaxy version leaving the door wide open for the iPhone 6. The larger screens believed to be part of the launch will remove one of the largest reasons customers have for not purchasing the iPhone, including this author and his old eyes.

In addition, Apple now has almost 800mm iTune accounts and is making increasing noises about moving into the mobile payment space. I like this idea more than the iWatch or other wearable technology rumors to drive the stock higher. With its huge community of users and ecosystem, Apple could be a major player in this space.

Even after today's big rise Apple shares are cheap compared with the overall market. Taking out its cash hoard and the stock sells for less than 10x forward earnings compared with ~16x forward earnings for the overall market. Add in a 2.4% dividend yield now and its value is still compelling.

I expect price targets and earnings estimates to be raised throughout the analyst community over the next week or so on the back of these great results. However, until we can break through ~$570 a share with conviction we could still be stuck in same trading range of ~$500 to ~$570 a share that has existed throughout 2014. Longer term the launch of the iPhone 6 which should occur sometime in the third quarter should power the stock through that trading range if we do not significantly breach it in the second quarter. ACCUMULATE

Source: Positives Are Mounting For Apple