Apple's $10 Billion Profit Is Not Enough?

| About: Apple Inc. (AAPL)

Summary

Apple's earnings and net profit shows strength during the off year of new products.

Apple's projections for next quarter are down, which may give investors reason to bid down the price.

Apple will release new products this fall that will produce record highs in earnings and profit for investors.

Apple's stock will climb to $120 by the end of 2016, which is over 20% appreciation in the stock price.

Reading different news and financial website you can find three stories a day telling you to buy Apple, and at the same time find three articles to sell the stock. On any given day I hear the next price of Apple (AAPL) to be $170 per share, and another for it to drop more. I understand why investors are confused and don't know where to go. As an analyst, I reviewed Apple's first quarterly financial report and I liked most of what I saw. Then the naysayers in the marketplace ripped Apple's drop in overall earnings and their projections with a massive amount of press reporting to encourage the drop in stock price from $105.08 on April 25, 2016, to a close on April 29 of $93.74. I want to review the facts and reassess the strength and quality of the company and why investors should be buying this stock as it is at sale price.

Some analysts compared this year's quarterly revenue of $50.6 billion to last year's (same quarter) of $58 billion and cried the loss of $7.4 billion of revenue. I remember Apple just released its S6 series iPhones in the U.S. in the fall of 2014 and customers were still trying to update into first quarter of 2015. Apple also expanded sales to other countries that were not able to get them in 2014. Fast forward a year and Apple is preparing to release its next iPhone this fall, but sales exceeded expectations for this quarter. Although the revenue was down, this is part of the cycle of a new product last year and this year we are seeing the pre-release waiting period. This was not a bad quarter for Apple - just some analysts did not bring in all the facts for their readers.

The net profit was down this quarter as well. Read the paragraph above, but let us put this into perspective. The company reported net income of $10.5 billion in 90 days. Not too many companies are doing that consistently. Looking back at 2014, the year between releases for Apple's product line had a similar result with revenue of $45.6 billion and a net profit of $10.2 billion. See the second quarterly report from 2015 for this comparison as well.

Apple's diluted per share profit in 2014 was $1.66 whereas in 2016 it was $1.90. When we compare years between product releases Apple showed an improvement in profit per share.

I would like to compare some apples with oranges, as I compare two companies with similarities and differences.

Company A has a book price of $23.82 per share, while company B has a book share of $28.43. Company A has a 9.00 earnings per share (EPS), where company B has a 1.25 EPS. Company A has a price-to-earnings (P/E) rate of 10.40, while company B has a P/E of 527.90. A third company has a book price of $9.52, the EPS is 1.29 and P/E rate is 38.70. Company A is Apple, Company B is Amazon (NASDAQ:AMZN) and Company C is Microsoft (NASDAQ:MSFT). Apple's earnings per share is better than both Amazon and Microsoft as this is actually company data from their financial reports. Earning 9 to 1 is much better than 1/25 or 1.29 per share. Apple wins. Apple's P/E rate is 10.40 compared to the over-inflated rate for Amazon of 527, and Microsoft's 38.7 is over 3x as high as Apple. What we see here is Apple is much more conservatively priced.

I do not want to take anything away from either company as Amazon reported its quarterly report with net sales of $29.1 billion and net income of $513 million for a $1.07 per diluted share. Refer to the above - Apple's revenue of $50.6 billion and $10.5 billion of net income. Amazon is not in the same ballpark. Even the earnings per share Apple reported $1.90 while Amazon was $1.07.

Apple's gross margin was 39.4 percent this quarter compared to 40.8 percent in the year-ago quarter. Still strong even with the reduced earnings level. There were some cost savings with the reduction of $7.4 billion as the company controlled costs better than anticipated to keep the gross margin that high with the loss on income.

Apple also is increasing their returns to investors as the company authorized an increase of $50 billion to the company's program to return capital to shareholders. Under the expanded program, Apple plans to return a cumulative total of $250 billion of cash by the end of March 2018.

The company also increased its share repurchase authorization to $175 billion from the $140 billion level announced last year. As the stock price has dropped, Apple will probably increase the shares it is buying now with a price under $100. The company will have the option to release these shares at a later date when the price moves higher. As the company buys these shares off the market now at the lower prices it will help support a higher price as investors wanting to buy Apple stock will bid the price up and create a higher demand. Secondly, with less shares on the market, the earnings per share will increase as the profits are dividend by less shares outstanding.

Apple increased the quarterly dividend by 10%, to $0.57 per share, payable on May 12, 2016, to shareholders of record as of the close of business on May 9, 2016.

Apple did provide its guidance for its fiscal 2016 third quarter: Revenue between $41 billion and $43 billion, gross margin between 37.5 percent and 38 percent, operating expenses between $6 billion and $6.1 billion, and other income/(expense) of $300 million with a tax rate of 25.5 percent.

This last paragraph may have been the target for many analysts to lower their targets on the stock price, but Apple has shown the ability to keep the gross margin strong, even as earnings slip. With this estimate we see the earnings at $41 billion, expenses at $6 billion and net profit over $8 billion for the 3rd quarter. I do understand the numbers are trending downward, but not without the understanding of the cycle the company is in.

The fiscal third quarter will be the quarter right before or during the release of the new products. The new iPhones, tablets, watches and laptops will all drives the sales and earning to new highs, beating 2015 records for earnings and profits. Apple has said they will try to release all products to a wider audience with the initial release.

Apple is a strong company with quality products a growing consumer base that wants the next product from the company. Apple has good financials with a $10 billion profit this quarter, like the last and multiple quarters before that. It has a future release of next -generation products coming out this fall that will beat all past sales numbers, earnings and net earnings for the company. With Apple's conservatively priced stock in the mid-$90s now and excellent P/E and EPS we see Apple with a potential for the stock price to appreciate at least 30% this year, meaning the stock price will climb to $120 by the end of 2016. Some analysts are calling for $170, and with the record sales of the next generation products out this fall it is likely $120 is conservatively priced. Apple is a buy at the price under $100.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.