Apple's Post-Recession Financials: Glorious

| About: Apple Inc. (AAPL)

In my "Can they Turn it Around" series, I looked at both Research in Motion (RIMM) and Sprint (NYSE:S). In both articles, I questioned each company's chances of revival due to their poor and weakening financials. Today, I'm going to look at the other side of the coin. The improvement in Apple (NASDAQ:AAPL) over the past 8 quarters (basically since the end of the recession). I'll first take a look at Apple's profitability, which is extremely impressive over the past 8 quarters.

Profitability 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011
Gross Margin 36.62% 40.88% 41.67% 39.08% 36.93% 38.51% 41.42% 41.73%
Operating Margin 22.22% 30.13% 29.48% 26.97% 26.78% 29.27% 31.92% 32.83%
Profit Margin 16.87% 21.54% 22.77% 20.72% 21.18% 22.45% 24.27% 25.58%
Return on Assets 3.26% 6.27% 5.54% 5.34% 6.16% 7.42% 6.59% 7.25%
Return on Equity 6.20% 10.62% 8.18% 7.89% 9.48% 11.72% 10.31% 11.17%
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Notice a trend here? You should, and it's a good one. All three margins hit new highs (for the period) in the most recent quarter. Gross Margins are up 5 percentage points, compared with RIMM, which has seen its gross margins down about 5% in that time. Apple's operating margins are up 10.6 percentage points, that's nearly a 50% rise in such a short time. RIMM's? Yeah, it is down about 50%. Profit Margins are a similar story, but even better. Up more than 50% over this time, while RIMM is down 40%. Apple is firing on all cylinders right now, and I don't expect that to stop anytime soon. In fact, I wouldn't be surprised if we saw profit margins hit 30% in the next two years.

Why has Apple been so successful? Well, first of all, it has products that people want. That always helps. Second, it sold so many its economies of scale kick in each quarter.

Activity 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011
Receivables Turnover 3.26 4.86 4.52 4.96 4.54 4.64 4.17 4.80
Inventory Turnover 14.98 17.99 12.97 12.11 12.88 16.99 15.92 18.31
Asset Turnover 0.19 0.29 0.24 0.26 0.29 0.33 0.27 0.28
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Inventory turnover is the key here. The higher the number, the more products you are getting out there. Apple keeps a low amount of inventory and has been selling more and more. This ratio should improve even more going forward. The receivables turnover, a measure of sales compared with your accounts receivable balance, has shown nice improvement and is near the top of this 2-year range. This means that Apple's sales are actually being collected, and it doesn't have to worry about not getting paid. A sharp drop in this ratio would be a huge red flag, but that's not the case here. The asset turnover ratio compares your net sales with your average assets balance, so the fact that it's not improving each quarter isn't too alarming. The ratio has been mostly constant over the past year or two, meaning that Apple's assets and revenue are growing at the same pace. Oh, what about RIMM you say? All three of these ratios have gotten tremendously worse in the past two years.

Coverage 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011
Debt Ratio 48.32% 33.67% 31.04% 33.39% 36.43% 36.98% 35.22% 35.05%
Cash Debt Coverage 42.09% 26.17% 45.23% 65.67% 75.89% 32.87% 48.83% 76.51%
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Apple's liabilities-to-assets ratio (debt ratio) has fluctuated over this time period, but it's not at any levels that would cause concern. Seriously, does anyone want to question the long-term solvency of Apple? RIMM's debt ratio is actually lower, which just means that it funds assets with more equity than liabilities, and as you would expect, it has worsened over the past two years. The cash debt coverage ratio shows that Apple's quarterly operating cash flow can cover a good portion of its current liabilities. Apple has plenty of operating cash flow ($27 billion in the previous quarter), so there are no concerns here. This ratio tends to fluctuate quarterly with every company, and there are no causes for concern here.

Liquidity 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011
Current Ratio 1.88 2.55 2.64 2.31 2.01 1.85 1.93 1.75
Quick Ratio 1.39 2.13 2.13 1.78 1.50 1.39 1.44 1.28
Working Capital $17.0B $20.2B $20.1B $20.4B $21.0B $20.1B $22.7B $20.0B
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I left liquidity for last because Apple does not have any liquidity problems. The company has over $28 billion in cash and short-term investments on its balance sheet. Now, if you were to give the current ratio part of this table to an average finance major, they would tell you that this company is in serious trouble. Really, Apple in trouble, no way. The reason this number gets lower each quarter is simple math. Current Assets started with a higher numerical base than current liabilities, so if they rise at the same rate the current ratio will always come down. Apple's current liabilities have actually risen a little faster than current assets over this time (on a percentage basis), but the difference isn't too alarming. As long as working capital stays near the $20 billion it has been at, there will be no problems for Apple. The same math argument can be applied to the quick ratio. No problems here. Apple's liquidity is fine, and should be for a very long time. RIMM's numbers have followed a similar trend due to the math.

At the last close Apple was down about $2 to $397. This decline was due to the drop in the overall market, and not because of Amazon's Tablet announcement. Personally, I think that Amazon's pricing at $199 means it isn't totally competing with Apple, which seems to be the general consensus. While this may steal some market share away from Apple, it is not a game changer. The fact that Amazon priced it lower than expectations ($249) might even have some negative impacts for Amazon's margins, as it might be forced to lower it soon to stay competitive.

Apple is primed for growth and will continue to grow for the indefinite future. That forward P/E of 12 makes this stock rather appetizing. The financial data I've presented above only makes the argument stronger. Out of 56 current analysts, 52 have buys or strong buys. That ratio is unheard of on the street. Only 1 analyst has a sell on the stock; not sure what this person is thinking really. The average price target for the stock is about $500, with some analysts at $650 or more. This is truly one great company.

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