Apple: Managing Disaster

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 |  About: Apple Inc. (AAPL)
by: Markos Kaminis

Apple (NASDAQ:AAPL) smartly tried to control the impact of the announcement that its idea-man and CEO Steve Jobs would need to take a medical leave of absence. The pre-release of this unfortunate information, ahead of the blowout earnings numbers, was meant to allow a free flow of funds to occur on the good news. If both pieces of data were released at the same time, the effect would very likely have been neutral to negative for AAPL shares. If only we had been focused Tuesday on Apple, we might have offered you an opportunity to benefit from beaten-down call options before they stabilized and recovered. So now the best we can do is prepare you for the decision tree before you and the prospects for Apple -- short, medium and long-term.

While it's clear what Apple's PR people were up to this past weekend (basically the best possible handling of the worst possible situation), what they may not be able to stave off -- no matter how hard they try -- is investor realization of the risk of the long-term loss of Jobs to Apple and its shares. Though the company is doing its best to make this seem bearable, we suggest that investors will increasingly question whether it is or not. As that uncertainty plays out and gains play, pressure should build on Apple shares, and so any momentum to the upside would seem to offer wise opportunity to seek a new driver for technology-born capital investment gains -- thus to exit AAPL and replace it with something else near-term.

Apple shares were up $4.25 or 1.25% after hours Tuesday after reporting EPS Tuesday afternoon, but only after falling $7.83 (2.25%) through the day Tuesday, the first day of trading since the best-timed release of Jobs' unfortunate news. AAPL shares had held their gain through much of Wednesday, but heading into the close Apple shares had moved back into negative territory. At the close, the stock had to account for a loss of near 1%.

It took this long for good reason, as the company posted blowout earnings, exceeding analysts' expectations by nearly 19%. The EPS gain was an astounding 78% greater than the year ago quarter. The company's quarterly net income, for one quarter and after expenses, was $6 billion. Apple's sales increased 71% to $26.7 billion in the quarter. Granted, this was the most important quarter for the consumer-oriented firm, but still, those are blowout numbers, period.

Thus, Apple's PR people had quite a situation before them with regard to how to manage the news that their iconic CEO would need to leave day-to-day operations to take care of himself. Given his importance to Apple, and the perception of his importance to Apple, this became more than just a problem of how to author a public release to best serve the man. Rather, it needed to manage how investors, both current and prospective, might react to this clearly unplanned division of the company from its brilliant CEO.

You'll note that in the short release, a letter Jobs authored to employees, he states that he will remain CEO and that the 2011 operating strategy had already been laid out. In other words, he'll still be actively involved, but off-site for the most part, while he takes care of his health problem. Secondly, there's reassurance in the fact that all the important product planning has occurred already for this year, so whatever magic might be lost, perhaps another amazing year lay in store for Camelot in 2011 at least.

I know where I would focus my product attention if I were Apple, but I'm still saving that idea for a later article I had better get to soon. While AAPL shares are drifting now, be careful not to underestimate the company's marketing savvy, nor its PR prescience. Another release or important news item might lay in store for just that scenario. That said, I would expect the company to let the news of Jobs' temporary leave sink in and digest completely before any such release were made. Thus, I would be taking short-term profits in AAPL, outside of valuation and on just an artistic point of view (versus scientific). I'm not even going to talk valuation in this article, because I don't expect it will matter given the special situation.

Besides the idea-man issue, what can make a seemingly cheap stock get cheaper is when it runs the risk of losing market share. It's hard for an innovation leader of Apple's size to keep growing, and it gets increasingly easier for such a firm to fall off the top of the hill. I only need reference all the competitors and products out there that appeal to the non-fanatical fans of Apple. These are market share threats that are being discounted by investment pros of any worth right now, considering that the genius Jobs has been stumbled. That said, let me remind you that over the medium term, beware the risk of already prepared corporate plans and a still savvy PR team at Apple. The next great catalyst for Apple and stopper of a stock slide could be just an email delivery away.

Short-Short Term: Sell
Medium Term: Buy
Long Term: Not So Clear Yet; Hold

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.