We are going to take a deeper look at Apple (NASDAQ:AAPL) today. The point of this article is to provide a two-pronged approach to investing. On one side, we are interested in investing in socially responsible companies. On the other hand, we are interested in investing in companies that can make us money. The focus of our articles is to look at companies from a socially responsible perspective as well as from an investor perspective -- then meet somewhere in the middle. We hope you enjoy these articles, and they give you a better sense of how to use social responsibility to invest. This article will be broken into two parts with the first part diving into the potential price tag for Apple with the second part looking at some of the socially responsible aspects of the company.
Price Target Assessment
With my previous company, The Oxen Group, we had done a very extensive look at the company. We will update that model today given recent developments. To start, my 2014 price target is $750 for the year. Adjusting for the split, that target drops to about $105-$110 range, which seems quite possible given the second-half momentum that seems possible for Apple with several new launches. The main thesis behind this target is that the release of the iPhone 6, new iPad, and the potential for Apple TV. Additionally, we looked at the potential for China Mobile to be a big winner as well as the iWatch.
Here are some of the highlights from previous work I did:
2014 should be a revolution for the iPhone. After several models advanced slowly, many are looking to the iPhone 6 to really push the envelope once again. The confirmed push is for bigger screens on the iPhone 6 that will push the overall size of the phone even further, but we would not expect a drastically "big" phone, as they'll try to make the screen push from side-to-side. Another likely development will be continued push on processors. The A7 64-bit chip was a major upgrade, and it is hard to expect much more from there. The areas where the company could make hay and where a lot of investors will be watching are the battery, iBeacons, facial recognition, camera advancements, and motion sensing.
Additionally, I wrote about China Mobile:
Getting in with China puts Apple in a much better condition to attack in emerging markets. CHL had 763M users in the latest figures. The company noted prior to the deal that there were 45M people using their phones - mostly acquired from foreign markets. That number accounted for about 60% of total iPhone users in China. The prospects from the deal are exciting. A lot of people have covered the deal, but we see the deal adding around 2.25 - 2.75 in EPS, as the company will make around 12-15M sales to CHL users in 2014. With an ASP of $630 (but potentially lower in China), should add a solid amount to EPS. We are going a bit more conservative in our model due to initial sales have been a bit weaker than were expected, and it may take some time to get the sales moving. Right now, Apple is only in 16 cities, but that could reach 340 by the end of the year.
The main focus of this section, again, is to establish a range of potential price targets to expect, but it is almost secondary to understanding the company from a socially responsible perspective. Therefore, we will spend less time on this section, and you can see some of my former articles here and here about that topic.
To start, what's the latest on the iPhone 6. The phone will hit stores in September/October, so we will start to see that impact in Q3. The phone is expected to be 4.7in and 5.5in in two different models. The phone will be thinner and more rounded on the edges. Additionally, the power button will move to the side. Another question is how the "Beats" acquisition will now be included into the new phone. Earbuds, powered by Beats, have been considered. Additionally, some type of Beats audio wiring/interfacing that ramps up the audio aspects of this phone. Rumors have been swirling about all the various things this could mean for the "6" - headphones that turn on when they get near your ears, new application that engages Beats with iTunes Radio, and more. Overall, Apple helped reinvent the audio experience once before, and it would not be surprising to see them try to do something again in the iPhone 6, giving even more credence to the potential success for this phone.
As for China Mobile, in the last update we wrote:
Let's turn to the latest results. The company sold a whopping 43.7M total iPhones in Q1, and China was a direct reason for that. Luca Maestri, VP of Finance and Corporate Controller, noted "the addition of China Mobile coupled with great response to our more affordably priced iPhone 4S led to an all time quarterly record for iPhone sales in Greater China." Expectations were for sales to come in at 37.7M. Revenue rose 13% in the China region versus a total company-wide revenue rise less than 5%, showing the strength of China.
Let's get into a breakdown of how we get to the $105 - $110 price tag.
Revenue: Starting the year, Apple had a 13% market share in mobile shipments and 30% in tablets. We believed that these were going to jump to 15-17% in phones and likely flat in the tablet market. With the iPhone 6 and iPad Air2 to be released this fall, we believe this action could be back-end heavy market share gaining year for Apple. How has the company done so far?
The latest reports show Apple at 15% right now, already hitting the levels that we had expected they could hit by the end of the year, post-iPhone 6 release. The company is working ahead of the schedule already, so that is definitely some great news. That estimate puts us at around 220M phones sold and 79M tablets sold. With an average sale price of roughly $600 per phone and $475 per tablet (which are likely low given the premium iPhone 6 and new iPad will likely reverse ASP back up), revenue from these products is likely to be $132B and $38B, putting revenue at $170B for these products alone.
We believe the rest of Apple's business can bring in around $40B in revenue, bringing us to a total of $210B, which does not take into account any other new products like an iWatch, Apple's car features, or a potential Apple TV development. Overall, we are looking at $210B - $220B in sales this year.
Where will net margins end up - we believe around 22% (given the rise in ASP). So far this year, net margins have been at the 23% area already, and we are looking at ASP probably rising in the back half of the year with the launch of new products. For operating margins, we are looking at roughly 28.5%. We used these margins in our cash flow analysis model. Operating margin and net margin, though, will be pressed to rise over the next several years with the company likely pushing growth by offering more things like the 5C to get growth in emerging markets.
Using a simple calculation of net margin x revenue / shares outstanding, we end up with a likely end of year EPS at around 8.03. That number x current P/E at 15 puts the price at $120. On the low-end of our P/E range, we look at 12 as an endpoint, putting our price target low-end at $95. All in all, we see upside to Apple for this year.
We are not done yet, though. The secondary part of our discussion has to be Apple's socially responsible grade. Right now, we are still working on how to develop this score card - what inputs go into, what matters, and how best to collect this information. Feel free to engage me at the end in the comments section to talk about what items are important to you to determine socially responsible investments. With that said, so far, we are using the following criteria:
- Gender Equality
- Green (carbon footprints, investments in green technologies, etc)
- Board of Directors
- Community Involvement
- Compensation Packages
The screening of companies for these criteria is challenging given the availability of data. My hope is to continue to expand on these, grow my presence, and eventually be able to dialogue with companies directly.
For now, we will do the best we can with the resources available.
One of the most interesting resources to see how men and women are stacking up against one another is Working Mother (workingmother.com). They put out lists of companies that are doing a lot to provide fair, equal opportunities for both genders. Apple did not make their Top 100 companies for working mothers. Additionally, Apple has only one female executive in Angela Ahrendts (a recent hire) as well only one female on their Board of Directors. Apple also recently refused to discuss their diversity in the workplace. For a company so innovative in the technology space, they are not willing (yet) to provide a deeper understanding of their approach to gender equality.
The company, though, has taken a strong stance on sexual orientation discrimination. The company's CEO Tim Cook recently wrote an op-ed piece about this:
Apple CEO Tim cook is calling on Congress to pass a bill that seeks to offer protection against workplace policies and practices that create disadvantages based on sexual orientation and gender identity.
In an op-ed piece published online Sunday by The Wall Street Journal, Cook urges the Senate to support the Employment Nondiscrimination Act, or ENDA, and calls on the House of Representatives to bring the bill to the floor for a vote.
The company did adopt new language to their charter earlier this year that also helped quell some of the issues surrounding the company's lack of diversity. Looking at the top executives, the company has very little diversity amongst the executives, and that is really not representative of the general population. Here is a link to that charter. The company has taken some steps in the right direction, but the company is still not willing to report data on their diversity. Further, management is made of nearly all white males. While the company is clearly a technology leader, it would be nice to see them lead the charge in allowing more diversity in their leadership.
This one sometimes is not considered, but a company has an integral part to play in the furthering of communities. Companies are often the main sources of jobs in a community, and they are often the leaders in communities. That is why companies are so important to be civic minded. There is an interesting Civic 50 being done by Bloomberg right now that will find the 50 most civic companies for 2014. The list has been put out in 2012 and 2013. Apple has not made the list yet. The places Apple does seem to support their community is in supplying their staff and mainly suppliers with education. A lot of Apple's business is outsourced overseas, and it is definitely positive to see them making an impact through education in these key areas. Yet, the company has gotten some poor remarks about their supplier chain in most other respects. From Charlie Kannel:
An article in The New York Times publicized unsatisfactory worker conditions, which included grueling 24-hour shifts, overcrowded dorms, exposure to toxic chemicals, and horrific explosions. Foxconn Technology Group operates many of the plants in question in Chengdu, China. Apple has audited many of its suppliers and found violations of its Supplier Code of Conduct, but requesting its suppliers improve working conditions is not as powerful as changing suppliers to ones with more humane conditions. Part of the problem is that Apple has no legal liability for what happens in Chinese factories owned by separate manufacturers. This is a clear case of Apple having to decide between what is legally correct and what is morally correct. Also, this represents one of those unfortunate situations where the socially responsible action is not what is best for business, as minimizing costs through cheap labor has led Apple to achieve such spectacular margins and profitability on its products. iSuppli even estimates that the cost of labor to produce the iPhone is only $8!
One place Apple does shine is that they have made a considerable effort to be an environmentally responsible firm. The company puts out very detailed environmental reports about each of their products that include the emissions from its production, what it is made of, and the various efficiencies of their products. I believe these types of reports are tantamount to allowing consumers to make wise decisions about the products they buy as well as informing the public about the environmental decision they are making by owning a product. Corporations that build consumer goods have a tougher time in controlling emissions in that they are looking to produce as much of a product that typically creates waste/emissions as they possibly can. Therefore, allowing the public to educate themselves about those products is a step in the right direction. The company, additionally, has progressed a lot to do a much better job of making their products more efficient.
And here is where socially responsible investing and profits co-align. A lot of users want a significantly longer battery life. A longer battery life means less plugging and means more efficient operations. That means we get a dual effectiveness for Apple in that they are building more efficient machines, and they are more likely to sell more products. What we can say is that Apple is moving in the right direction here. The company has done a nice job of balancing a craze in demand with social responsibility to the environment. The company was one of Greenpeace's Do Not Buys for a long period of time. Yet, in the past year Greenpeace has been applauding Apple for eliminating toxic materials, materials in conflict areas, and setting a bar in 2014 for climate leadership. The company is now using 100% renewable energy at all data centers, which is setting the bar in the tech space.
The company definitely does pass well here, and we believe that Tim Cook has really started to push Apple in not only its green emphasis but in other ways.
Apple, though, needs more recognition for its community involvement, answering questions about suppliers, and working on a more diverse workforce that is led by a group of people that represents its own culture better.
Apple is one of the companies that I look at and say that is a great stock, and they make a great product. Yet, they are a company that I would rather own and then pressure to make changes rather than blacklist. The company has done well in some areas of social responsibility, and they have areas to improve. The company is not a socially responsible leader in many areas, but it is a stock with a lot of potential upside as well as a great deal of safety. We will continue to report on Apple as we grow our thought process about how to think of socially responsible investing. Please feel free to leave comments about your thoughts on this as we want this conversation to continue!
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.