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Summary

  • Apple has been one of the best performing large cap stocks in the market since dipping below $400 a share late last June.
  • The company has confounded skeptics with its ability to maintain margins and boost its stock price via measures to enhance shareholder value.
  • The shares should continue to benefit from the shift in sentiment on the stock, the new iPhone 6 launch and its still cheap valuation.

What a difference a year makes. Last year at this time the stock of Apple (NASDAQ:AAPL) was in the midst of a long decline from a peak of over $700 a share achieved in mid-September of 2012. Critics were blasting the company for losing its ability to innovate since the passing of Steve Jobs, questioning the sustainability of its high margins and predicting its slow demise. The stock plunged to less than $400 a share in late June.

Since then Apple has been one of the best performing large cap stocks in the market. Margins have proved to be remarkably resistant and are still in the high 30s and it inked major distribution deals with NTT Docomo (NYSE:DCM) in Japan and China Mobile (NYSE:CHL). It also had a successful global launch of the iPhone 5C/5S.

Although no completely new products have been announced yet, Apple stock has shot up for three major reasons. First, it has done a great job employing financial engineering to move the stock price. It took advantage of the company's rock bottom stock price and huge cash hoard to announce a $60B stock buyback authorization last summer along with a better than 15% dividend hike.

The company has aggressively deployed this stock buyback authorization and already bought back more than $40B in shares since last summer. It recently announced it was increasing its stock repurchase program by another $30B and bumped its dividend payout again by 8%.

Apple also stated it would split the stock 7 to 1 in early June. This should provide a nice psychological boost and is the perfect split size to eventually be put in the price weighted Dow Jones Industrial Average. Even after all these moves, the company still has a whopping ~$150B in net cash & market securities on the book.

Second, Apple has proved it can maintain margins and increase revenue by incremental improvements to its flagship and iconic iPhone and iPad franchises. This will continue when the company releases the iPhone 6 later this year which will include larger screens that have long been clamored for. These new versions of the iPhone and iPad have allowed Apple to maintain margins in the 36% to 38% range. In addition, sales of the iPhone have been stronger than expected. In the last reported quarter, Apple reported it sold some 43.7mm iPhones; approximately 6mm more than the consensus.

Finally, the zeitgeist on Apple has changed in 2014 compared to 2013. For most of last year sentiment was extremely negative when the stock spent a good portion of the year in the $400s. A week rarely went by without some sort of "Has Apple lost its mojo?" story popping up on a major financial site.

2014 has been a different story as the company has benefitted from exceeding low expectations as well as a flight to the safety of blue chips from the momentum names & sectors that led the market in 2013. The stock is up more than 15% YTD and analysts who were cautious on the shares when they were much lower last year continue to up their price targets on the shares. Two more did so today.

In short, Apple has regained its mojo. The speed of this reversal of sentiment has even caught this author by surprise as I thought the stock would remain in a tight trading range with a ceiling of $600 a share until the announcement of the iPhone 6 launch date. I am happy to be proven wrong.

At the first of the year I predicted the shares would hit $650 a share by the end of the year; a target that more and more looks like it will look conservative by yearend. Subtracting its net cash, the shares still sell for some ~10x forward earnings. The shares are not the screaming buy they were when they dipped below $400 a share in late June, but still should outperform the market. ACCUMULATE

Source: Apple Has Regained Its Mojo