Like the character Howard Beale in the movie satire Network, "I'm as mad as hell, and I'm not going to take this anymore.” In short, I am sick and tired of the negative spin that mainstream media feels compelled to inundate the public with. I woke up this morning to a plethora of headlines on Apple (AAPL), a company I am long on, that could only talk about Apple’s disappointing quarter. What follows are just a few examples:
From the Wall Street Journal: Apple Loses Some of It’s Shine
From MercuryNews.com: Apple Fails to Hit Wall Street Projections
From Zacks: Mighty Apple Whiffs In the 4th
From CNBC: Apple’s First Miss Since 2004
From MarketWatch: Apple Shares Drop After Earnings Miss
Then I turn on the morning news, I really need to quit doing that, and a very sweet reporter is talking about how Apple disappointed investors by missing analyst’s expectations. But worst of all I get a quote and see that Apple’s stock is down more than 5% in the pre-market on the so-called terrible news.
Now, what follows is an excerpt of Apple’s actual press release that drove all the negative headlines that are causing its stock to drop:
“Apple Reports Fourth Quarter Results
All-Time Record Mac and iPad Sales
Highest September Quarter Revenue and Earnings Ever
CUPERTINO, California—October 18, 2011—Apple® today announced financial results for its fiscal 2011 fourth quarter ended September 24, 2011. The Company posted quarterly revenue of $28.27 billion and quarterly net profit of $6.62 billion, or $7.05 per diluted share. These results compare to revenue of $20.34 billion and net quarterly profit of $4.31 billion, or $4.64 per diluted share, in the year-ago quarter. Gross margin was 40.3 percent compared to 36.9 percent in the year-ago quarter. International sales accounted for 63 percent of the quarter’s revenue.
The Company sold 17.07 million iPhones in the quarter, representing 21 percent unit growth over the year-ago quarter. Apple sold 11.12 million iPads during the quarter, a 166 percent unit increase over the year-ago quarter. The Company sold 4.89 million Macs during the quarter, a 26 percent unit increase over the year-ago quarter. Apple sold 6.62 million iPods, a 27 percent unit decline from the year-ago quarter.
“We are thrilled with the very strong finish of an outstanding fiscal 2011, growing annual revenue to $108 billion and growing earnings to $26 billion,” said Tim Cook, Apple’s CEO. “Customer response to iPhone 4S has been fantastic, we have strong momentum going into the holiday season, and we remain really enthusiastic about our product pipeline.”
“We are extremely pleased with our record September quarter revenue and earnings and with cash generation of $5.4 billion during the quarter,” said Peter Oppenheimer, Apple’s CFO. “Looking ahead to the first fiscal quarter of 2012, which will span 14 weeks rather than 13, we expect revenue of about $37 billion and we expect diluted earnings per share of about $9.30.”
A Great Quarter
Any way you slice it, Apple booked a great quarter. You can even say an awesome quarter. 99.9% of every publically traded company would give its proverbial right arm for a quarter like Apple had. Apple stock should not be down on this news, it should be up. In fact, based on their incredible past, present and future earnings power we believe that Apple is extremely undervalued. Since a picture is worth a 1000 words, the following earnings and price correlated F.A.S.T. Graphs ™ shows just how cheap this powerful tech titan really is.
Since 2001, a time period that includes two recessions to include one of the worst on record, Apple (AAPL) has grown earnings at the incredible compounded rate of 32.1%. This includes 36% growth during the great recession itself. The company has no debt, over $81 billion in cash and forecasts a $37 billion first quarter for fiscal 2012. Yet Apple trades at a mere 15.9 PE while Amazon (AMZN) commands a PE over 114. How does that make sense?
The consensus estimate of 36 analysts reporting to Capital IQ, expect Apple to grow future earnings at a rate of 20.5%. Based on the estimated earnings and return calculator below, if Apple achieves that estimate and their stock traded at an appropriate PE of 20, by calendar year end 2014 the stock would be worth over $1000 per share (see flag on graph). This is less than half of what their earnings grew last quarter. But their stock is trading down this quarter. This is nuts, in our opinion.
Apple had a tremendous quarter. It should be reported that way, state the facts, report the numbers as they actually transpired and let us decide whether is was disappointing or not. In our opinion, Apple’s numbers support a better valuation than the market is currently awarding it, based on the fundamentals behind this great technology stock.
Disclosure: AAPL long at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.