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  • AAPL Is Cheap

    By Jason Born, CFA

    Ahh nostalgia. Remember when Will Smith had America "Gettin' Jiggy Wit' It?" Or do you remember when Aerosmith, in one of their multiple reincarnations told us they, "Don't Want to Miss a Thing" as Liv Tyler wept and Bruce Willis and Ben Affleck saved the planet? We do recall these seminal events in world history for the year was 1998, not so long ago for anyone who remembers life at the beginning of the Internet Revolution, but a lifetime ago in the technology industry.

    We look back to that time period because we want to see if we may glean any information to make our view of today and beyond simpler. We like constructs or frameworks based upon the past because they can act as short-cuts to make dealing with today's complex decisions more straightforward.

    In the late 1990s Microsoft (NASDAQ:MSFT) and Cisco (NASDAQ:CSCO) were on growth trajectories to take over the planet. The media loved them. Investors loved them. Even by mid 2000 when the bloom began to come off the technology bubble, these companies had still given their long-term investors an extraordinarily profitable ride. If you happen to be on the youngish side (say under 35 years of age) you may wonder why we are talking about such archaic companies as these in 2012.

    The tables below show that these companies may serve as an example of what is in store for the operations not the stock price our very dear Apple (NASDAQ:AAPL) in the future. Media, investors, and consumers love AAPL just like they did MSFT and CSCO a little over a decade ago. But before you "wig out" (we don't really know if the kids are still saying this phrase that is particularly wonderful in our minds) about what this means for AAPL's stock price going forward, please let us explain.

    (click to enlarge)

    The point of this exercise is to see what happens to revenue growth rates and net income margins of highly successful companies. It is a universal truth in capitalism that fantastic success brings competition, some good and some great. Within the technology space in particular, that competition is usually quite disruptive and may even make the initial successful company irrelevant. While irrelevance may occur or be occurring to both MSFT and CSCO, it has not happened yet as evidenced by their continued growth.

    That growth, however, has been much slower following the boom days. For example, CSCO posted annual revenue growth of 53.3% for the five years ending July 2000. Since then it has averaged about 12%. The growth rates have slowed due to competition and industry maturation. Microsoft, due to its software products' ubiquitous nature, has fared better with regards to growth since 2000.

    So which of these companies, MSFT or CSCO - if either, will AAPL's revenue growth rates be like going forward? About 90% of Apple's revenues come from hardware such as iPod, iPad, iPhone, and Macs. And since the history of all technology companies demonstrates that hardware companies have the most difficult time maintaining an edge, we believe that we should expect sales growth and margins to move more in line with CSCO than MSFT. Remember, competition, especially in technology is a powerful, unavoidable force.

    Before we run forward projections for AAPL it is important to note the returns CSCO investors received since 2000. Following those heady days of the late 1990s, CSCO investors would have suffered a -5% annual return over the last twelve years (yes that is a negative average return each year). But it is important to distinguish operational similarities such as revenue growth or income margins with stock prices - more on this in just a moment.

    With that in mind here are our high level forecasts for AAPL (note that 2012 numbers are estimates as AAPL has yet to announce their FY 2012 full year results as of this writing).

    (click to enlarge)

    We show revenue growth averaging 12% for the coming decade which is just like CSCO's following 2000. Net income growth slows to 8%, a calculated result as the company posts lower margins.

    The upshot of our analysis is that even with a drastic slowing of growth rates and margins, down to the level CSCO achieved, AAPL seems very inexpensive today - cheap even, with an intrinsic value of $773 per share.

    This short exercise proves the very reason we run our shop the way we do. Growth rates are fun. Growth rates are sexy. But, growth rates are trumped - every time - by the price you pay. Cisco Systems was not a bad investment in 2000 because its growth was about to slow. It was a terrible investment because it was priced for shoot-the-lights-out performance for eternity. We don't have that problem with AAPL at these prices. We can acknowledge its likely slowdown in growth rates and margins, without automatically claiming the stock is not a bargain.

    At around 20% undervalued, AAPL will serve investors looking for a company to own for five or more years quite well if purchased at today's prices. So if you're like Stephen Tyler from Aerosmith and you too, "Don't want to miss a thing," consider adding AAPL to your portfolio of diversified holdings.

    Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: long-ideas
    Oct 25 3:55 PM | Link | Comment!
  • 2010 First Quarter Review
    Will Health Care Reform Derail the Economic Recovery?
    More of the Same
    In our Fourth Quarter Review, we again addressed why we believe the economic recovery is sustainable and would not be derailed by government deficits, at least in the near-term. As expected, we have continued to see steady improvement in most economic indicators, confirming our view. Most of the primary concerns persist including government spending, unemployment, and housing. Due to the surprise resurrection & passing of health care reform, many are now also asking, “Will health care reform kill our economy?”
    1st Quarter Review
    The S&P 500 gained more than 5% in the first quarter, despite a moderate pullback of around 7% from mid-January to mid-February (as we expected in our last letter). From its’ low in March, 2009, the S&P 500 is up about 75% as the market continues to recognize what we have been sharing with you over the past year. We can’t help but reflect on many of the common comments we heard in the first quarter of last year, such as:
    “I don’t trust the market anymore.”
    “There is no way we will recover from this.”
    “Everyone is saying the market will drop further from here.”
    “It makes no sense to be in the market at this point.”
    It is easy to understand why people felt this way and very hard to ignore these emotions as we were suggesting. We have recently seen the damage caused by other investors or advisors following these emotions and are thankful we had the strength and wisdom to trust our rational, fundamental research. 
    While the risk of a double-dip recession has receded further, concerns still abound, which have kept investors from becoming overly optimistic, leaving potential for further growth in the coming year. 
    Let’s take a quick look at some recent news updates, then address a question many of you are asking. We have revised the following points to focus on more relevant economic data.
    • Manufacturing – Factory orders continue to grow, as the ISM Manufacturing Index is now up nine straight months to 60.4 in April. According to Mark Zandy, Chief Economist at Moody’s Analytics, “Manufacturing is leading the way for the economy.” How can this be?     *Institute for Supply Management
    • Inventories – One of the reasons we were so confident in the economic recovery last year was wholesale inventories, which bottomed at historic lows in December before starting to grow in January & February. However, sales have been rising for 11 months through February, creating considerable demand for continued growth in manufacturing and jobs.     * U.S. Commerce Department
    • Unemployment – As we suggested last quarter, job growth has resumed, with 162,000 jobs added in March. This makes the third month out of the last five to experience job growth. The unemployment rate is down to 9.7% and we expect this to continue to improve throughout the year. But due to the number of people still out of work, it will likely be at least 2-3 years before this number drops to 6%.     *Based on data from US Bureau of Labor & Statistics
    • Leading Indicators – an index of leading economic indicators rose 1.4% in March, now up for 12 straight months. This strongly suggests continued growth in the economy for the next 3-6 months.     *The Conference Board
    • Economy GDP growth for the fourth quarter of 2009 was 5.6% and initial results for the first quarter show continued growth of 3.2%. It is becoming increasingly difficult to deny the recession is over, but many are still trying. 
    *U.S. Commerce Department – Bureau of Economic Analysis 
    • Healing in the Financial System – Healing has continued as many banks are reporting strong earnings, despite the continued high level of foreclosures. Many have also been writing-up the value of assets that were written-down last year, just as we expected. Full healing will still take several years, so we expect the Fed to keep short-term rates low for the next year or two, although increases are likely in the next quarter or two.
    *Sources include the Bureau of Economic Analysis-,
    • Inflation – Inflation continues to be tame, as we expected, with the Consumer Price Index only rising .01% on average from January to March. If inflation becomes a serious issue, it won’t likely be for 2-3 years. Refer to our 2nd Qtr. 2009 Review for a more detailed discussion.    *U.S. Bureau of Labor Statistics
    • Housing – With foreclosures still at record highs (RealtyTrac Inc.) and home construction still abysmally low (U.S. Commerce Department), many are still pessimistic on housing. However, according to Case-Shiller, home prices nationwide have stabilized and are rising, although there are still pockets of extreme weakness. Home sales have also increased more than expected (National Association of Realtors), probably due to government incentives. Altogether, we expect continued stabilization and recovery in housing, but at a very slow rate.
    Will healthcare reform kill our economy?
    After appearing to die a slow and painful death last year, healthcare reform was revived and passed using some legislative tricks, despite evidence it was not supported by a significant majority of Americans, nor did most members of congress read the bill.
    Is reform needed in our healthcare system? Absolutely!
    Will this bill solve the problems with the current system? Probably not!
    While there will undoubtedly be several revisions before much of the bill is enacted, we believe this bill will likely lead to higher costs, limited & lower quality care, and shortages of medical personnel. It is simple economics.
    However, there will also be many “winners” as a result. Hospitals and pharmaceutical & medical device companies will likely come out on top as demand will rise and there will be fewer “charity” cases for hospitals. 
    While we hope we are wrong, we believe most Americans will come out “losers” due to higher taxes, higher insurance costs, and lower quality care. But we do not believe the overall economic implications are as bad as many fear. While any resulting tax increases will certainly put a damper on economic growth, the rest of the health care issues will simply lead to shifts in economic activity, but not economic destruction. Businesses and consumers will adjust, as we always do. 
    Thank you very much for the confidence and trust you have placed in us! We are honored and take the responsibility very seriously. If you can think of any way we can serve you better, please let us know. 
    Have a wonderful spring! 
    Kind Regards,

    Darren T. Munn, CFA

    Camelot Portfolios, LLC is a Registered Investment Advisor offering portfolio management services to clients.  Branch Office is located at 1700 Woodlands Dr. Suite 100 Maumee, OH 43537.  All disclosure documents and ADV II / Schedule F are located at .  Please review the disclosure documents and ADV II / Schedule F before investing.  Hard copies may be obtained by calling (877) 315-5558.


    The views expressed in this letter are for educational purposes only and are subject to change at anytime based on market and other conditions and should not be construed as recommendations.  This letter contains forward looking opinions that involve risk and uncertainty that could cause actual results to differ materially from those expressed.  Readers are cautioned not to rely on, nor our we obligated to update our forward looking statements.  Readers assume all responsibility for any investment decision made as a result of the views expressed herein. Camelot Portfolios, LLC is not associated with any broker dealer.

    May 06 5:08 PM | Link | Comment!
  • No Fees - Scam or Real?

    It doesn’t take a genius to understand that investments with lower fees will produce higher returns for the investor, all else being equal.  So it is natural for us all to be attracted to low-fee investments.  A simple formula to keep in mind is:  Gross Return – Expenses – Taxes = Net Return.

     But what about financial vehicles with no fees?  Is there such a thing? In the past week, I have heard people claiming there are no fees on Fixed/Indexed Annuities, CDs, and even on several well-known, no-load mutual funds.  For this article, we will focus our attention on the first two products, as the third doesn’t even warrant an argument.
    The key with each of these is the definition of “fees.”  Are banks and insurance companies non-profit entities?  Do they work for free?  Clearly, they must be generating revenue and profit from annuities and CDs, so what is the catch?
    The trick with each of these is using a fixed or stated return.  Instead of disclosing the gross return generated from your money, they simply offer a Net Return (before taxes), which is derived using the formula:  Stated/Fixed Return to Investor = Gross Return – Spread (expenses & profit).  Depending on the product, the spread is typically 2-4%. 
    So by offering a fixed or stated return, they avoid having to disclose the expenses embedded in the product.  Technically, there are no “fees,” but there are certainly expenses.  Is this wrong?
    While I do not believe it is wrong to offer products with a fixed or stated return, it is very deceptive to sell them using the pitch of “no fees,” especially when comparing them to other products where the fees and expenses are disclosed.  This is magnified with many Equity-Indexed Annuities, in which the insurance companies can move the “caps” (stated return) to assure their own profitability. 
    The bottom line – there are no investment products with zero expenses, costs, or fees.  Be wary of anyone selling a product using the “no fee” pitch.

    Disclosure: No position
    May 06 5:04 PM | Link | Comment!
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