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Summary

  • Apple has taken the initiative in value creation, after much criticism and due to activist investor interest.
  • The company's stock split and its dividend and share repurchase hikes illustrate value-added efforts to date.
  • What comes next has got to be on the operational front if Apple is to retain upward momentum.

In my reporting on Apple (NASDAQ:AAPL) over the years, I believe I've been an early voice exposing catalysts or the absence of catalysts behind the stock's movement, or rather lack of upside movement. It has sometimes taken a while for the company to find the route I have laid out in my articles. Eventually, though, it seems my message gets through judging by the actions that the company eventually follows through with. Or, more likely, at the insistence of activist investors, Apple is finally actively seeking to correct its valuation, which has been deeply discounted to that of peers for too long now. Whatever the case, Apple is clearly and finally seeking to add value by means other than operational actions. However, what comes next is likely going to be an operational catalyst. If it's not, then another of my articles may prove prescient, and it's one that would definitely drive change at Apple. The good news is that I don't see that happening, and I do see Apple finally rising to new heights.

This article was inspired by Apple's 7-for-1 stock split. You see, back in August of 2012, I penned an article entitled Time to Split Apple. Around that same time, for the sake of argument, I also reviewed reasons why the company might not split its stock in The Case Against an Apple Stock Split. Still, I held to my belief that a stock split would be value added within the second piece. I think you'll find both articles interesting reading.

It's certainly interesting that a stock split happened because Apple seemed opposed to it when the stock was soaring toward $1,000 a share. Cutting the shares while near $650 shows a clear change in the point of view at HQ. Did we have something to do with it? That part is unclear. I think it's more likely that mounting pressure on the management team under the presence of an activist investor's interest caused the action.

The same pressure seems to have spurred Apple to take some more of our advice, though we never suggested it pay more money out in dividends. In April, the company raised $12 billion in a debt offering, intending to use the capital raised to increase its share repurchase plans to $90 billion, versus the $60 billion previously allotted, and to raise its dividend by 8%. These are all value-added endeavors the company had previously left on the table, but as pressure mounted on it to make up its valuation difference to peers, it was forced to do more.

In two recent articles, I drew comparisons of Apple to Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and to General Electric (NYSE:GE). At the start of this year, I said Apple could add 68% more value by emulating Google in one certain manner. Then, in April, I noted how General Electric seemed to maximize its value through the same means I saw employed at Google, and showed how Apple seemed to be missing that opportunity. In summary, my point was that Google and GE both actively marketed themselves as innovative technology companies, which are actively employed in exciting new creative R&D endeavors for the betterment of mankind.

Google is well known now for its active efforts in all sorts of areas. Google Glass and its driver-less car are but two obvious examples. I suggest that the company is benefiting from those efforts even though it is not generating significant revenues yet in many of them. I believe the company offers incentive for investors to bid up its shares prospectively and extends the P/E valuation of its stock. Of course, it must then execute, but in the meantime, it does well for its shareholders.

GE is a company some people might have thought of as an appliance maker if not for its long-standing history of developing and promoting its innovation and technology leadership. For this reason, GE has a valuation that exceeds that of peers in similar businesses. GE, today, is still marketing itself as an innovator, as evidenced by its popular new TV commercial discussed in the report mentioned.

Apple, though, has kept its innovative efforts private while under development. The company's secretive nature about new products is such a part of its culture that it has spawned successful blogs that are completely dedicated to anticipating what Apple is working on. The company has had little to say about anything new of late with regard to new product segments or gadgets. Though, it dropped some hints at its latest developers' conference. Outsiders have actively speculated over the years about a smart Apple television, and more recently a smart watch and a new payments system. Like Google, Apple is rumored to also have plans for a home management system.

I've been hoping the company would talk more about its R&D efforts and technology development for years now. I've only dug up a few articles for you here, but in March of 2013, I indicated that Apple Must Send the Right Message, and I said For Apple, No News is Bad News. Well, the company has been making news lately. Its acquisition of Beats Music and Beats Electronics caught many by surprise, including yours truly. Apple immediately said its reach would expand Beats' sales immediately internationally, but most suspect Apple has bigger plans than that for Beats, like perhaps giving incentive to iPod users to buy them. I suspect Apple envisions Beats gear on more than just the trendy and musically talented in new markets globally, but also for every music enthusiast currently using the iPod and the iPhone, which is replacing the iPod for many. Watch for that as well…

The company's capital return plans are well documented. Moving forward, Apple will likely do more on the operational front. We know it's about to offer a new iPhone with a bigger screen that should bring in everybody for an upgrade. But if Apple finally gets around to launching completely new product segments, it could really move the dial and get stock momentum rolling again. I expect Apple would rejoin the ranks of high flyers that include Tesla (NASDAQ:TSLA), Google and others today. It's bizarre that Apple has a beta coefficient of 0.74, wouldn't you say?

I'm not sure we can call Beats a new product segment; it's more like an add-on in my view. I'm talking about the watch, the television, the Internet of the home, and the payment system. At this point, the television alone would not stir up much locomotion for the Apple train, but the watch or the television could if Apple brings something new and unexpected to the table with either. If Apple acts like its old self and reinvents how we think about these things and gives them more uses, the kind of uses that makes everyone want to own the gear, well then just one of these will get the stock's P/E ratio up closer to rivals.

Stock

P/E Trailing

PEG (on TTM EPS, 5Yr Growth)

P/S

Apple

15.4

1.0

3.16X

Google

29.5

1.8

6.1

Amazon (NASDAQ:AMZN)

511.4

11

2.0

Microsoft (NASDAQ:MSFT)

15.5

2.3

4.1

Apple trades cheaper than this group of peers, despite seeming to deserve to trade at a premium given the pervasiveness of its products in the U.S. and abroad. But it's the company's prospects that hold it back, as investors aren't sure what will help it keep growing. Remember my article, Is Apple's Growth Tiring from back in 2011? The company has not yet fully answered the question, though its big move into China this year certainly starts to.

Apple will have one last opportunity to really rev up its shares in my opinion. The company must finally introduce at least one new product segment, whatever it may be, this year and probably before the start of holiday shopping. If not, I suspect the shares will lose some of their upward lift despite everything else the company has done. I'm not predicting a decline, just a loss of momentum. The stock will still be served and supported by its financial results, which should continue to satisfy holders happily holding and collecting dividends at a 2.1% yield now. Even so, failure to launch higher will raise the volume of the calls for a change atop Apple like we've already seen shock Microsoft. I would be shocked if yet another year passed without a new product line at Apple. Who cares what you think, some might be thinking to themselves at this moment - oh, just the guy holding the playbook.

Source: Apple's Playbook Revealed