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I am a California native who has been investing for over a decade, ever since I was a teenager. A self-proclaimed Warren Buffet follower, I believe in "buy-and-hold" meaning I look for solid companies that are good growth stories, that I know and am familiar with, that will present... More
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  • Apple's Margin Of Victory This Holiday Season

    Apple's (NASDAQ:AAPL) shares have performed well of late, off their recent sub-$400 lows to around $500 today. The company's recent earnings call most assuredly gave CEO Tim Cook a sigh of relief, as the market cheered the results and the stock has had an upward trajectory. Interestingly, the stock has rallied in the face of some apparently troubling updates on Apple's traditionally high margins.

    Margins on the iPhones dropped from 42.8% in the year-ago-quarter to 36.9%, signifying a drastic decrease in the amount of money apple generates from each unit. Forbes explains,

    "[a] year ago, Apple was making $607.85 per iPhone in revenue, while today the company reported $581.10 per unit. The same fact shows up with iPads, Apple second-best selling device, with 14.6 million units shipped in the third quarter. Apple now makes $436.07 in revenue per iPad, a 15% decline from a year ago."

    There is substantial speculation about why the margins are dropping, but it is clear that when Apple breaks out the numbers, we can see only 50% of iPhone sales are for the newest model, while consumers are also opting for the older generation models at discounted prices. Indeed, on the earnings call, Tim Cook admitted as much, pointing to"strong" sales of 4 and 4S units as the primary reason margins decreased quarter-over-quarter, when the 3GS was not as attractive. So while Apple actually broke its record for most iPhone's sold in a quarter, clocking in at 31.2 million units, the squeeze on margins kept Apple's numbers from being truly surprising to the upside. But do margins tell the whole story? There are reasons to believe that Apple will be poised to take advantage of the back-to-school and holiday shopping seasons, and perhaps even seen margins tick upward as well.

    Low Cost iPhone

    Could a new, lower cost iPhone actually improve Apple's margins?Some analysts seem to think so, and if executed right, it is possible. Right now, consumers not opting for a new generation iPhone 5S have the option of purchasing 5, 4, and 4S models. Of course, once flagship handsets in their own right, these older models, that bear the same materials and costs they did when they were newly released, do not sell for as much anymore, given their age. As a result, the profit margin Apple garners from selling these units is lower than when the device is brand new and commands a high price point.

    How could a new, less expensive iPhone change this dynamic? First, the price point begins lower than a new, high end model. This in turn will attract consumers who desire owning an iPhone but do not, or cannot, spring for the high end. In places like China and Brazil, a low cost iPhone could conceivably tap into this lower end market and compete with devices from competitors like Samsung where it traditionally has not competed, or has only offered older models, and their lower margins. And although attracting a new market does not necessarily affect the math on Apple's margins, it could absolutely buffer their importance to investors, as the sheer volume of the iPhone units can drive the revenue numbers higher, even if they are not making as much per unit. If Apple is able to sell millions more iPhones, even at a lower margin, revenue can improve.

    Instead of selling the 5, 4S and 4 units at reduced prices that shrink Apple's margins, the new bargain model has a fresh slate, and components and manufacturing will be designed in a way so that the lower price point could still garner a higher margin than selling a 4S at a reduced price would. Analysts at ISI Group tend to agree, positing that a low-end handset could attract margins of 40%+. If Apple is able to achieve a solid gross margin on the bargain model, and leverage this into selling a large volume of units, the updated product mix will bode well for Apple's revenue, earnings, and conceivably its stock price.

    Of course, introducing a new product in the fall/winter quarter could spark some of that consumer sentiment Apple has enjoyed over the years. Perhaps you won't see long lines around the corner on launch day, but any catalyst that can drive foot traffic and sales is welcome.

    Improving Consumer

    Readers of Feria know that there is good reason to believe the data on the improving economy, even in light of the recent stock market sell-off. Retail sales are signaling an improving economy, as the Commerce Department reported core retail sales up half a percent in July. The recent US GDP print, revising the growth rate upward to 2.5% also showed an improving economy. Consumer confidence, measured by such surveys as Thomson/Reuters and the Conference Board's index of sentiment also point to a more optimistic shopper. Finally, jobs numbers have been positive, albeit somewhat unsatisfactory; yet growth continues. The winding down of the Federal Reserve's Quantitative Easing, coupled with rising oil prices appear to have the potential to be headwinds for the consumer, and the stock market more generally, so how the economy absorbs these elements will tell the tale of the holiday shopping season.

    But with an updated product mix and attractive price points, shoppers could reward Apple with another blockbuster holiday quarter. The consumer appears to be in the strongest position financially in years, being the most optimistic in years, with the most jobs available in years. If Apple can once again be the pick of holiday shoppers, it stands to gain handsomely from their generosity. Further, if Apple can improve the margins on its flagship iPhones, and in turn continue to sell them in record numbers, revenue at Apple will climb, and the stock price should reflect this. Apple is a good long-term play this holiday season if it can provide the spark the consumer is looking for, so we would like to take a "wait-and-see" approach to the new launch in early September. But if you believe the launch to be promising, now may be a good time to buy.

    Disclosure: I 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.

    Tags: AAPL, long-ideas
    Aug 29 3:48 PM | Link | Comment!
  • Apple, Icahn, And Returning Value To Shareholders

    News of Carl Icahn's stake in Apple (NASDAQ:AAPL) blew up the Twittersphere and news outlets on Tuesday, a testament not only to Icahn's influence but also to the Twitter medium. Icahn will surely provide more insight on his expectation for Apple, so far leaving us with a brief opinion on the company, saying "that a larger buyback should be done now" and that he believes the company to be "extremely undervalued." Let's take a look at why Icahn may believe Apple to be undervalued, and how the prospects of a share repurchase fairs for the stock.

    Apple has a notorious cash position. As of the latest earnings call, Apple boasts $147 billion dollars cash on hand ("COH"). We won't get bogged down in the endless admonitions about what Apple has been missing out on by not spending much of its COH, but suffice it to say Apple could buy several companies (AT&T, Netflix and Waze come to mind) and still have plenty left over for research and development, new store openings, and the proverbial rainy day. It has been able to accumulate such a large cash position based on the high margins and sheer volume of units of iPhones, iPads and other products it sells. Former CEO Steve Jobs famously hoarded cash in an effort to keep Apple nimble, with plenty of dry powder should an opportunity arise. It made very few acquisitions since its COH began to grow exponentially, even as its cash dwarfed the GDP of several countries around the world. It was only until recently that Apple decided to return value to shareholders by issuing a dividend and beginning a share repurchase program, the one that Icahn finds to be too meager.

    Apple began its dividend and share repurchase program, stating, "Even with these investments, we can maintain a war chest for strategic opportunities and have plenty of cash to run our business. So we are going to initiate a dividend and share repurchase program." When a company repurchases its own shares, the upshot is that it essentially reduces the number of shares held by the public. The "float" is consequently reduced, and even if profits remain the same, earnings per share increases (the numerator, earnings, stays the same, while the denominator, shares, shrinks). Notably, Icahn made no mention of the dividend that Apple pays, but instead intimated that the company should buy back more shares. Companies often decide to tinker with a greater share repurchase program than with increasing a dividend payout, since they like to avoid having to reduce the dividend in future leaner years, and would prefer to abandon or shrink a buyback program.

    Tax implications of share repurchases versus dividend payments are also important. When a dividend is issued, shareholders are taxed upon their disbursement, after the company is already taxed when it earned the money (though in the case of multinational companies like Apple, what it means to be "taxed" is an entirely different story). With a repurchase the company pays nothing to the taxman; the shareholders that sell back to the company, however, do pay capital gains on their profits.

    According to Icahn, Apple is undervalued; therefore, buying more shares now could help the market correct the undervaluation, and Apple could then reissue them for a profit. Apple's large COH position could conceivably withstand a much higher payout for a share repurchase program than initially designed, a $10 billion plan at first. This represents less than 10% of Apple's COH, so it will be interested to see how much Tim Cook and the folks at Apple decide to increase the number, if at all. It is unlikely that the dividend is increased by much, as the aforementioned danger of reducing it in future leaner times could have lead to an adverse reaction among shareholders.

    The market cheered Icahn's announcement, with the share price up around 20 points at the time of writing this article. This unadulterated bounce could obviously be the result of several aspects of Icahn's tweet, from the prospect of a greater share repurchase program, to perhaps the simple fact that Mr. Icahn likes Apple, believes it to be undervalued, and has taken a financial stake. It is just the latest indicator of positive momentum for the stock, as Apple has rallied from sub-$400 per share earlier this summer to almost $500 a share today. This rally could continue in the near future if impending product launches are a success, as Apple has traditionally done pretty well over the back-to-school and holiday shopping seasons. The doldrums Apple's stock has been in so far this calendar year, vastly underperforming the market, could potentially be a thing of the past should the momentum continue. Keep an eye on the September product launch and on the holiday frenzy, and you could see Apple reward you handsomely, especially with Carl Icahn fighting for returning value to shareholders.

    Disclosure: I 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.

    Tags: AAPL, long-ideas
    Aug 14 11:04 AM | Link | Comment!
  • Earnings On Deck: Can NGVC Continue To Grow?

    Going public a little over a year ago for $15/share, Natural Grocers by Vitamin Cottage (NYSE:NGVC) has experienced strong buying interest; it currently sits at approximately $35/share, well over a 100% gain since its IPO. What justifies such strong upward trajectory? For those that follow Feria, you know that we like to put a company under a growth microscope and examine the drivers that might lead to future returns.

    NGVC is a natural, organic food retailer in the mold of a Whole Foods (NASDAQ:WFM) or Trader Joe's. It operates over 60 stores in 13 states, with plans to open 3 stores in the current fiscal quarter, 6 stores for the rest of the fiscal year 2013, and 4 stores for fiscal 2014. Although we would like to see further storefront expansion going forward in 2014, NGVC is growing at a moderate clip, and management remains focused on "affordable pricing, nutrition education, and customer service" as means to strong comparable-store sales growth. In fact, the last earnings report 11.6% increase in comparable-store sales growth in the first half of fiscal 2013 from 2012, as net sales increased over 25% compared to the year-ago quarter. NGVC has also maintained positive comparable-store sales growth for the last 40 quarters, quite a feat.

    As a point of comparison, Whole Foods operates approximately 350 stores and has already opened over 15 new stores year to date. NGVC is clearly operating on a smaller scale as Whole Foods, which gives it the "underdog competitor" aura that satisfies itself on nipping away at such a large competitor (Whole Foods market capitalization is a hefty $20 billion compared to Natural Grocers' $780 million). If Whole Foods can serve as an example of the type of organic food market that exists in the US, Natural Grocers could benefit by continuing to grow and exploit the sector.

    As earnings approaches, several points of interest will become clearer for the market. First, can NGVC maintain its consistent comparable-store sales growth? The ability to attract a larger crowd or a crowd that is willing to spend more money at an existing store remains a challenge for any retailer, of groceries or otherwise. Secondly, the growing number of stores will continue to be important; management noted that its real estate portfolio selection for 2014 was close to complete, so an update on the outlook of store openings will provide color into this important factor for NGVC's growth. Feria would like you to listen intently on comparable-store sales growth, store expansion, and the (probable) increases in net sales during the earnings call for clarity on NGVC's growth story.

    Disclosure: I am long WFM. 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.

    Tags: WFM, NGVC, earnings
    Aug 07 1:46 PM | Link | Comment!
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