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Background in corporate finance at multiple Fortune 200 companies including real-estate, media, and banking. Believe strongly in detailed analysis of company balance sheets and income statements, going into deeper detail than the average investor. Look to identify companies whose fundamental... More
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  • Apple Or Google - Invest In The One With The Bigger Cash Pile And Reset Expectations

    The rise and fall of Apple (AAPL) has been something to behold while watching from the sidelines. Today the noise around the company and its future is greater than at any time in recent memory. The positive takeaway is that expectations and perceptions about Apple's future growth are in the process of getting reset. Apple shareholders should be happy to let Google (GOOG) take the mantle of the darling tech stock and the market expectations that come with that status.

    Where does Apple Go From Here?

    The quick answer is who knows. The stock while maybe in the process of bottoming would not be immune from a market wide sell-off if one were to materialize. Additional potential downside does exist, however, whether it is warranted or not. Try not to spend your time trying to predict the next short term move for Apple. Instead, gain an understanding regarding the foundation of financial support that Apple has and why the company rates as a fantastic investment today. Once that occurs, establishing how and why to invest in the company becomes much easier.

    Cash is King

    This story is not overlooked, but, it clearly should be the second point of discussion behind future growth rates when discussing the Apple business. People could debate growth rates until they were blue in the face. However, there is no debating the war chest of cash that Apple has and will continue to amass. Assuming that Apple were to see zero growth in their business and simply maintains the current levels seen in 2012 the following chart shows what would happen to their cash position:

    This assumes that the share count stays flat at about 947M shares outstanding. The above cash projection is also based on the table below. This shows the annual cash flow that would be generated with no future growth based on the results from 2012:

    (click to enlarge)

    After factoring in no revenue growth, the current dividend payment, and the stock buyback previously announced Apple will in all likelihood have over $200B in cash or close to $220 per share by the end of 2015. This equates to the company having more than 50% of today's market cap as cash on their balance sheet in 3 years.

    The lingering question from the market is what should Apple do with that pile of cash. Clearly current investors in the stock, especially those who bought in at a much higher share price, would like to see the cash put to use in a way that would drive the share price up. As an investor buying Apple today, having the company continue to pay a 2.5% yielding dividend and sit on their cash is not such a dreadful thing. This cash pile places a discernible floor under the stock price and allows one to invest with more confidence knowing that the company has this war chest for use in the future. A more prudent play for Apple to return cash to shareholders is simply to issue debt to fund this distribution. Apple could issue a one time $20 per share dividend yielding almost 5% by issuing about $20B in debt. This debt could be issued at about a 2.5% coupon rate. It would cost the company $500M in interest expense a year or just a little more than .50 a share in EPS.

    This solves the problem of placating investors clamoring for a cash distribution as well as holding on to the cash war chest the company has amassed.

    This does not overlook the fact that a significant portion of the cash Apple has today and will generate in the future is held overseas. So at some point if this cash were to be used in the United States it would clearly be taxed. It is more prudent for Apple to utilize the cheap debt they have access to. This is the best alternative in order to return cash, not currently parked in the United States, to investors. In the future, world and economic growth will continue to be as foreign as it is domestic. The odds that Apple cannot find accretive uses for their foreign held cash are slim to none.

    Apple Provides Much More Security Than Google

    As briefly mentioned before, Google now appears to be the tech stock that everybody wants to own as it sets it own record high. The problem with Google as an investment at what may be the market peak is that they control their own destiny much less than Apple does. If the economy begins to retreat and companies pull back on their advertising, there is not much Google can do to offset this dynamic. The prior recession of just a few years ago showed that consumers, outside of housing, are relatively resilient and still want the best gadgets. Businesses, however, showed that a quick lever they can pull to reduce costs is reducing their marketing spending. This goes right to the core of the Google business and can cut deep. Apple is a company that has a distinct identity solely focused on producing exceptional hardware and software. Google, on the other hand, seems to enjoy throwing money at futuristic glasses, talking shoes, self driving cars, and a litany of other projects that may never even make it to market. They at times seem to take their core search business for granted. At the same time, they have companies such as Facebook and Amazon who are becoming bigger competitors in the core search market. As these companies and their websites become the landing pages, for more and more internet users, they will increasingly be a threat to Google.

    In Apple, we have a company that is laser focused on their core business. They have had their market expectations reset and have a war chest of $120B in cash. In the other corner, we have a company, in Google that has taken the mantle of tech darling who can do no wrong just as the market may be peaking. They have a business model highly correlated to businesses and not so much consumers. At times, it is hard to tell if their identity is that of a search engine, hardware manufacturer, or inventor of products for the next movie in the series of "Back to the Future". They also have less than half the cash balance of Apple with around $50B as of the end of 2012.

    Taking that all into account it sure would seem that Apple provides a safer investment opportunity with more upside attached to it.

    Investment Opportunity

    Given the uncertainty of where the broader market may head next it still is a good time to buy Apple. A strategy to offset a market downturn that would hit Apple as well would be to buy the stock today and sell calls against your position. Buying the stock today around $430 a share and selling the January 2014 $500 calls for $20 apiece would provide a return of about 4.6%. This gives downside protection in the event the stock were to fall further. At the same time, one can own the stock at a great valuation of 10x earnings. In addition collecting the dividend which currently yields about 2.5% annually at today's stock price. Finally, if the stock does go on a tear and ultimately goes above $500 a share by January 2014, there is 16% upside to the entry level in the stock. If the stock were to rise above $500, this strategy would result in about a 25% annualized return before taxes.

    Investors who want to own Apple, or any stock for that matter, focused on a 100% return are going to fail far more often than they succeed. Go for the 25% annualized return with a company that has sufficient cash firepower at their disposal to protect against much further downside from its current level.

    Disclosure: I am long AAPL. 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: GOOG, AAPL, long-ideas
    Mar 14 12:05 PM | Link | Comment!
  • Apple - Why Tim Cook's Screen Size Comment Is Ignorant

    Lots of articles are going to get written about Apple (AAPL) in the coming days proclaiming it as a great buy, a declining business with falling gross margins, and frankly both the bulls and bears will probably have good points.

    From a purely trading standpoint if the stock does not immediately rebound on the open of trade (indicated to be down $50 or over 10% post earnings) I would look to an income generating trade and sell the Jan 2014 $400 Put's which should yield around 8% depending on the volatility and if stock continues to fall after the open.

    At $400 a share if the stock were put to you Apple would be paying a 2.65% dividend, should have close to $175B in cash by the end of 2013 (which would be close to 40% of its market cap), and for all intents and purpose Apple is not going to disappear overnight so the trade should prove profitable.

    However one thing about the earnings call did concern me to the extent that it seemed Tim Cook was ignoring reality. When asked in a nutshell if the I-Phone screen size being smaller than some of the new feature Android phones Tim Cook had this to say:

    "Hi Bill, it's Tim. The iPhone 5 offers as you know a new 4-inch Retina display, which is the most advanced display in the industry and no one comes close to matching the level of quality as the Retina display. It also provides a larger screen size for iPhone customers without sacrificing the one headed ease-of-use that our customers love. So, we put a lot of thinking into screen size and believe we've picked the right one."

    As soon as I read this I immediately though back to some of the great quote's from the RIMM management team as they dismissed the I-Phone when it first came to market. My favorite is this one from Jim Balsillie:

    "As nice as the Apple iPhone is, it poses a real challenge to its users. Try typing a web key on a touchscreen on an Apple iPhone, that's a real challenge. You cannot see what you type." - Balsillie, November 2007.

    Its quite clear that there is not only demand but actually significant and growing demand for phones such as the Samsung Galaxy SIII and Note that feature screen sizes from 4.8in to over 5in.

    But here we have Tim Cook basically saying Apple has it right and that the 4in Retina Display is the right size and trying to justify that somehow that you cant use a bigger phone with only 1 hand. Unless the target audience for Apple is made up entirely of small people or teenage girls I think plenty of people who own larger smartphones have no problem handling them with 1 hand. I think the consumer disagrees Tim and a vast majority of them want a bigger I-Phone.

    For all those saying Apple needs another revolutionary product it is staring them in the face - it's making a phone out of the best that the current I-Phone offers combined with the Ipad Mini.

    But in the world of smartphones as RIMM painfully figured out if you wait 12 months to realize the competition has found the new sweet spot while you proclaim from your throne that only you have the product specs that consumers want - you will get left behind in a hurry.

    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, earnings
    Jan 24 9:45 AM | Link | Comment!
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