Buy Apple As It Gets Serious About Inorganic Growth

May. 9.14 | About: Apple Inc. (AAPL)


Apple is gearing up for one of its biggest acquisitions ever as it targets inorganic growth.

This comes after the company conducted a major bond sale, which will be used to fund its growth and buyback expenditure.

Analysts are eying double-digit top and bottom line growth.

Just a few weeks ago, Apple's (NASDAQ:AAPL) chief Tim Cook said that the company made 24 acquisitions in the last 18 months and was actively looking for more opportunities. That opportunity might just have arrived. According to a recent report by Financial Times, the company could acquire a premium phone and music accessories maker for $3.2 billion.

This deal comes after the company announced its $17 billion bond sale. Through the additional funds, the company can easily continue with its buyback program as well as invest in its inorganic growth.

As for its flagship product iPhone which drives its organic growth, the business has reported strong growth numbers in the emerging markets, particularly the BRIC nations. In China, the company's three key products are gaining market share.

Major Acquisition

Apple is reportedly trying to acquire the headphone maker Beats Electronic in a $3.2 billion deal, which could be announced as early as next week. The deal could significantly enhance Apple's footprint in the music accessories market and would support its online music business.

Beats is the biggest player in the premium headphone market. The tech giant, could be, however, overpaying as last year, Beats was valued at $1 billion. The headphone maker also has a subscription based online music streaming service, which is similar to Spotify and Pandora (NYSE:P).

The deal could be huge news for Apple, not only due to its size, but also due to Apple's history. Historically, under its founder Steve Jobs, the company has shied from making any large acquisitions. In fact, the company has never made billion dollar acquisitions.

The company is already rumored to be in talks with Renesas Electronics (OTCPK:RNECF) to acquire its majority stake in its unit, called Renesas SP Drivers, which develops chips for smartphone displays for nearly $479 million. Renesas SP Drivers is a joint venture between Renesas, Sharp and Taiwan-based Powerchip. Renesas owns 55% of Renesas SP Drivers.

Despite its massive size, the deal will not have any adverse impact on Apple's organic growth plans, or its buyback program, thanks to the second round of bond sale announced just about ten days ago.

Bond Sale

Last month, Apple sold bonds valued at $12 billion, taking advantage of the low interest rates and strong demand from investors. Last year, the company sold $17 billion of bonds, which was the biggest bond offering in the corporate world at that time.

On the day of the offering, nearly $40 billion of orders were reported but final books were closer to $35 billion.

Like the previous bond sale, the current one was also cheap. The 10-year and the 30-year bonds yield just 77 basis points and 100 basis points more than Treasuries. In the current sale, however, the percentage of the relatively cheaper long-dated bonds is just 29%, as opposed to last year when it was 50%.

Apple wants to reward its shareholders through a massive $90 billion buyback program which ends in 2015. The company has massive cash reserves of nearly $150 billion, 88% of which are held in overseas markets. However, the cost of bringing back the money is higher than the cost of borrowing in the bond market. For this reason, the company opted for the bond sale.

Buying Back Shares

Apple started buying back shares around 2 years ago. Since then, it has spent nearly $30 billion on buybacks. In fact, in the last five years, just nine S&P-500 companies have spent more than Apple on buybacks.

The company is now using the bond sale to increase its rewards to shareholders. The company has already ramped up its buyback program from $60 billion to $90 billion. Moreover, the company has also increased its dividends by 8%.

iPhone Going Strong In Emerging Markets

Apple's iPhone continues to be its flagship product. In its quarterly results announced last week, the company reported 17% year-over-year growth in iPhone sales volume to 43.7 million units. The company witnessed strong demand from the developed as well as emerging markets, particularly the BRIC nations.

Apple is currently expanding its distribution channels in the emerging markets. The company has also opened its first store in Turkey and Brazil. In the first half of the current fiscal year, Apple witnessed 56% growth in Turkey and 61% growth in Brazil. In Russia and India, sales climbed 97% and 55% respectively. In Vietnam, the company reported 262% growth.

Increasing Market Share In China

Apple has delivered a solid performance in China by gaining market share in China's smartphone, PC and tablet markets. During last quarter, Apple's revenues from China rose 13% to record levels of $9.8 billion.

The company's iPhone sales in the country climbed 28%, better than IDC's market growth forecast of 20%. Similarly, the company sold 13% more Mac units when IDC predicted 8% decline in the market. The tablet sales also increased by 6% in a period when IDC predicted flat growth.

This comes after Apple entered into an agreement with China Mobile (NYSE:CHL), the largest carrier in the country with around 770 million subscribers, which is more than twice as large as the total U.S. population.

Conclusion: Buy Apple

According to data compiled by Thomson Reuters, analysts believe that by 2016, Apple's revenues could climb by 18.4% from FY2013 to $202.32 billion while its earnings will increase by 29% to $51.31 per share. The relatively bigger increase in earnings per share is partly due to the repurchase program.

In short, with both organic and inorganic growth, as well as a massive buyback program, Apple is up for some serious revenues and EPS growth. The company also gives a generous yield of 2.42%. Yet the shares are priced just 14 times its trailing earnings, which is cheaper than the industry's average of nearly 16 times trailing earnings.

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.