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Ray Merola
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Individual investor focused upon a limited number of diversified stocks. Seeks stocks selling below fair value; favors dividend growth. Advocates fundamental investment analysis, supplemented by the technical charts. Options strategies primarily employed to generate additional income or hedge risk.
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  • What If Apple Purchased Volkswagen Outright?

    What if Apple (NASDAQ:AAPL) bought Volkswagen (OTCQX:VLKAY) outright?

    + = ?

    Yes, I've read about Apple execs are talking with BMW about partnering the Apple Titan. I've also read about VW's problems. Things can change fast in business.

    Here's some thoughts about the situation. What do you think?

    The Apple Titan is Coming

    Apple has indicated it plans to enter the automobile market. I have no reason to doubt it. Recently, Fortune ran an article outlining some ramp-up figures. The prospective Titan development staff is being increased to 1800 people. For comparison, Apple utilized about 1000 people to develop the iPhone. Only a few hundred were necessary to develop the iWatch. Something big is going on.

    I can think of several reasons why the Apple Titan isn't just likely coming down the pike, but a potential winner:

    • Currently, the auto market is ripe for disruptive technology. Both the internal combustion engine and "human driver" paradigms are being challenged. When it come to melding advanced technology with customer appeal, Apple is a global leader; arguably the best on the planet.
    • Apple is already in the business of assembling things. Of course, Apple designs and distributes outstanding tech products. However, at its core, Apple outsources components and assembles gadgets through a premier global supply chain. Required competencies to outsource building a car or a computer aren't far removed.
    • Electric cars are far simpler to engineer than internal combustion automobiles. There are far less moving parts. The biggest issue: battery life. Who other than Apple (perhaps Tesla) is better-suited to understand, develop and control battery utilization? Let me be clear: I'm not sure I want to get stuck in the paradigm that Apple is wed to the electric car. We just know that's the first step. But I digress.
    • Apple is an aspirational brand; its products have a "look and feel" to them that delight customers. And Apple has a LOT of worldwide customers already. Some might say cult-like. I submit customers buying an Apple product, and likely up-paying for it, is largely an emotional experience. What's another product that's primarily an emotional purchase? Yes, folks, it's buying a new car. Believe it.

    Volkswagen is in the Dumps....For Now

    Well, sort of.

    I won't rehash the emissions software problems VW finds itself embroiled in; it's all over the internet. Indeed, willfully ginning up and installing software in at least 11 million vehicles to "beat the system" is a pretty big problem.

    Isn't it?

    Certainly, a firestorm has started and won't go away anytime soon. Heads will roll. Criminal charges are possible. Negative media coverage is certain.

    Despite the hype, and sans some "green" attorneys: no one has been killed by the software. On September 28, Forbes ran a good piece about this. Recommended reading.

    What we've learned from Toyota in 2005, and more recently General Motors, is that the media makes far more of recalls and brand damage than consumers. You can go back farther in history, and the auto recall story is littered with the same story: big-splash headlines, allegations, threats, a search for the guilty, apologies, subsequent lawsuits/fines, and a year or two all winds up.

    The aforementioned reasoning, if you buy it, isn't only a good reason for Apple to consider buying Volkswagen. It's also a primary reason it won't happen. VW management knows it can make amends, pay restitution, clear its name, and carry on.

    Volkswagen Isn't Going Under

    In each of the past 2 years, the Company generated $11 to $12 billion operating cash flow. In 2015, VW logged $7.8 billion in just the first 2 quarters. The balance sheet is alright. On June 30, cash and short term investments totaled $32.7 billion.

    However, VW's market cap has fallen from a June peak of $74 billion Euros (US$81 billion) to just $31 billion Euros (US$34 billion) this week.


    If we accept no irreparable damage will be done to the franchise, coupled with the fact that customers will have a difficult time proving how they were harmed personally (unlike Toyota or General Motors), doesn't a $47 billion haircut seem a little harsh?

    Toyota Motors (NYSE:TM) and General Motors (NYSE:GM) ended up with regulatory fines of $1.2 billion and $0.94 billion, respectively. Recall cost GM a couple billion more. GM ended up recalling about 30 million vehicles.

    How many VW cars require a recall so far? 11 billion.

    Toyota and GM also racked up hundreds of millions of dollars in personal injury and wrongful death judgments/settlements. I'm sure VW customers will try, but less certain how far they will get.

    So Why Apple / Volkswagen?

    Here's a few thoughts:

    • Apple's got plenty of dough. As of June 30, 2015 Apple owned a balance sheet containing $203 billion in cash and investments. Today, VW had a market cap of just $34 billion. Chump change for Apple.
    • Apple's got the dough mostly in overseas accounts. AAPL management has been in a quandary with what to do with its overseas cash. Most of the hoard is held outside the United States. Funds repatriated to the U.S. carry a hefty corporate tax. Apple has been raising cash by selling EU bonds to avoid sending cash back to Uncle Sam. On the other hand, Volkswagen is based in Germany. Buy it and Presto! No tax.
    • Purchasing a existing automaker affords Apple advantages. It accelerates production, as manufacturing facilities are in-place. It accelerates customer interface, as VW distribution and dealer networks are in place already. Finally, it offers Apple an inside track into some of the best-and-brightest automotive minds in the business. VW didn't become a premier global automaker with low-rent engineers, production management and marketers. The recent scandal is a management issue, not an engineering / technology flub.

    Now some readers may say, "Any automobile company can offer Apple similar attributes." Perhaps some can. However, I counter:

    If Apple wants to "buy" automobile production, a dealer network, and experienced automotive engineering talent, there's a very limited shopping list. Poaching talent or buying one-off factories is too slow. Most auto companies don't want to get bought out; and certainly not by Apple. I suspect auto companies prefer "strategic partnership agreements," or perhaps some kind of a joint venture.

    For Apple, a straight buyout may be a better approach. Why?

    Any kind of a strategic agreement or joint venture, by design, offers Apple automotive physical plant and intellectual expertise (which Apple likely needs), but combines it with shared financial decision-making and profits (which Apple likely does not need). The purchase of an existing automaker could put Apple into the position of calling all the shots, and reaping the profits. In addition, current auto culture is unlikely to be in Apple's interest. Not to mention that joint venture partners can often wear multiple hats: "I'm your best friend today, and your worst competitor tomorrow."

    Today, Volkswagen stock is "on sale." The shares are trading at a 60% discount versus market value just 3 months ago.

    Another plus: an Apple acquisition of Volkswagen, the biggest automaker in the world, causes no antitrust issues. Regulators will not challenge a tech company purchasing an auto manufacturer.

    What's in it for VW?

    A shot in the arm. A new start. Embracing the younger generation. Leading edge technology. Being cool. I'm not sure the current Volkswagen is considered cool.

    Closing Thoughts and Musings

    Apple stock is inexpensive on earnings or cash flow. Volkswagen shares are in the pits. I never buy a stock based upon takeover rumors: real or fabricated. So for me, a spec buy on VLKAY is out. However, AAPL isn't overpriced (ttm PE 12.6x, forward multiple 11.2x, PEG ratio 0.86x), and premising Apple will eventually make a big waves by branching into a new enterprise that combines tech, youth, and "cool," I would be hard pressed to tell someone to dismiss a bid on AAPL.

    Some pundits scoff at Apple entering the auto market. A Wall Street Journal article asked the question front-and-center:

    On its face, a car seems like a disastrous thing for Apple Inc. to build. Cars are a brutally commoditized, terrifically expensive, generally low-margin industry. Entering the car business is like getting into a land war.

    I'm not so sure. The automobile industry is primed for disruptive technology, younger car buyers are changing long-held views on transportation, and Apple is savvy enough to segment the market. I don't envision the Company seeking the low-end commodity market. Apple generates buzz, and caters to aspirational customers.

    Kind of like what they've done with smartphones.

    I suggest Apple could be better off buying automobile expertise and physical plants outright versus partnering for it. JV partners may have conflicting business interests.

    Currently, Volkswagen stock is on-sale. Maybe VW could use a bit of a "white knight." I don't believe Volkswagen faces long-term damage to either its franchise nor its finances.

    Apple has the money to do an all-cash transaction; add an uplift and closing costs, it wouldn't make much of a dent in the overall balance sheet. Much of the cash is overseas, thereby the purchase of a German company avoids U.S. corporate taxes on repatriated money.

    I believe Apple will gladly play "the long game." For instance, the Company could very likely be a leader in the "self driving" concept, which I contend isn't far-fetched at all. Apple won't do it unless it's done right.

    As a matter of fact, who's to say that an Apple Car would look anything like a typical vehicle today? You know, I've often wondered why we often fire up two tons of steel with enough space inside to haul around 5 people and their luggage to drive 3 miles and get a gallon of milk.

    To be fair, there's issues. VW management may believe it can weather the storm and be on its way without Apple. Apple may already be in deep with BMW. Currently, Volkswagen stock trades at a 0.52x price-to-book value. Maybe Apple would just see too many problems and go away.

    But what if Apple didn't go away?

    Just sayin'

    Please do you own careful due diligence before making any investment decision. This article is for information only, and isn't a recommendation to buy or sell any stock. Good luck with all your 2015 investments.

    Tags: VLKAY, AAPL
    Sep 29 10:40 PM | Link | 7 Comments
  • An Opportunistic Options Play For Intel Bulls

    For those of us who believe Intel Corp (NASDAQ:INTC) is methodically making the necessary moves to reinstate investor confidence and propel the stock higher, I offer an interesting option strategy. This short article outlines the trade mechanics, overview / risk analysis, and an investment thesis.

    This "long combo" play includes the following basic characteristics:

    • High leveraged return; very low capital outlay
    • Conservative risk / reward profile
    • Primary risk entails potential of having to buy Intel stock at a 4.5 percent yield

    The Trade

    Buy OTM (out of the money) Intel January 2015 calls at $25 strike price; and sell the corresponding January 2015 OTM puts at a $20 strike. As of the writing of this article, the net debit for this trade was $0.31 cents. INTC stock traded at $24.07.

    Overview and Analysis

    The net effect is a very inexpensive upfront trade. The current price for 100 shares of Intel stock is about $2400, sans commissions. Each net contract purchased affords the investor the control of 100 shares of stock through January 2015 for $31, plus commissions. Effectively, selling the puts nearly covers the cost of buying the calls. In addition, the call strike is less than one dollar out of the money, whereas the puts are over four dollars out of the money.

    This strategy simulates the action of buying the stock, but does so at a fraction of the cost. It also simulates the action of a long position, but there is a "flat" middle ground between the strike prices.

    My outlook is Bullish. The view is long-term (over a year).

    Here's the risk profile for this trade. It helps to see the action in a picture:

    (click to enlarge)

    courtesy of Ameritrade ToS platform

    Please note the major highlights. Upon expiration:

    • If the stock trades between $20 and $25, I lose my investment - $31 per contract
    • If the stock falls below $20 a share, I must take a larger loss to buy back the put contracts, or I can buy each contract of 100 shares for $2000 apiece. Indeed, the ultimate potential loss is $20 a share: assuming Intel stock becomes worthless in January 2015.
    • If the stock closes above $25, my upside is unlimited (just like a long position). However, my capital outlay was only 31 cents a share versus the current long price of $24.

    One of the major drivers that make this an attractive strategy for me is the fact that the historic and implied volatility figures for Intel options are currently very low. This means that I'm paying a relatively small amount above the higher strike options (the "premium") for the right to control the shares for some 19 months. By the same token, I have to take a relatively modest premium on the short puts. Here's a chart that compares the current option volatility versus the historical volatility:

    (click to enlarge)

    courtesy of

    Please note that the 30-Day Historic Volatility is down around 16 percent. This is unusually low for this issue. The Implied Volatility (IV Index) is also relatively low at this time of the year, creating a nice entry point for purchasing long calls.

    Now let's talk some more about risk and reward. I will dwell much more heavily upon the downside risk versus the upside potential.

    Downside risk

    The primary downside risk of this trade is the stock falling below $20 a share and getting "put" the stock. My thesis is that at $20 a share, Intel represents a bargain. I will gladly buy at that price. The opportunity cost of reserving cash to cover the shares is almost nil in today's interest rate environment.

    The current option ITM probability places an approximate 40 percent chance the stock will end up less than $20 a share by 2015. I am willing to take this chance. Indeed, at $20 a share, and assuming no the current cash dividend payout, the shares would yield 4.5 percent.

    The trader should also be aware that as a option holder, he / she is not entitled to any dividends unless the option shares are purchased: either by exercising the long calls, or getting assigned the short puts. Owning the stock long will likely provide the shareholder with some $1.35 or more of cash dividends over the term of the option period.

    Upside Reward

    Very simply, I capture all the upside if the shares rise above $25 between now and January 2015, with virtually no cash outlay. There is very high upside leverage.

    Intel Fundamentals, Trade Thesis and Expectations

    Part of my trade plan involves a general willingness to buy shares if "put" to me. Therefore, a key issue is confirming that I like the underlying shares sufficiently to own them long; even in the event of a downturn. Furthermore, I require a reasonable basis for premising the stock will rise. Since, earnings and cash drive stock prices, let's walk through a brief fundamental analysis for Intel Corp.

    Intel Fundamentals are Sound

    I am bullish on INTC stock for several reasons:

    • Fortress balance sheet
    • Consistent, high cash flows
    • Strong, safe dividend
    • Good catalysts for improved earnings

    Fortress balance sheet: Intel has a particularly sound balance sheet. The 0.26 debt-to-equity ratio, while still solid, has increased over the past year or so. This isn't a reflection of management determining that the company cannot cover its business from regular cash flow. No, senior leadership has noted that borrowing funds to pay the dividend is actually cash-positive. The unusually low debt interest rates are actually lower than the current cash dividend payout. A moderate increase in debt levels is a good thing for Intel.

    Liquidity remains very high. The current ratio of 2.4x and ample FCF offer management the opportunity to invest heavily in the business. The enterprise is further bolstered by $3.43 per share in cash and investments.

    High Operating Cash Flows: INTC is a cash machine. Despite PC sales headwinds, the company has generated between $16 and $21 billion a year in OCF. Despite analyst concerns about high capital expenditure, Intel continues to spin off nearly double the amount of cash required for its capital intensive growth plans.

    Strong, Safe Dividend: Reinforcing my earlier comments about the dividend, Intel management has emphasized their commitment to the cash dividends for shareholders. Over the past five years, the annual payout has been increased by an average of 14 percent. Today's 3.7 percent yield puts Intel neatly within the top quintile the S&P 500 in this category. Despite high capex, the dividend is easily covered by Free-Cash-Flow. The 2012 FCF / dividend per share ratio was the lowest in recent years: still clocking in at 1.6x.

    Catalysts in Motion: Few market sectors experience change like Technology. Intel is no stranger to both change and fierce competition. My short take on the business is simple.

    1. Intel set upon becoming the dominant PC chipmaker; it now owns about 80 percent of that market.
    2. Intel set upon becoming the dominant server chip manufacturing company; it now produces about 80 percent of business' server chips.
    3. Intel was late to the handset / tablet market, partly by design and partly by underestimating market growth. Current management now is quite aware of the battleground. I contend that Intel will become an irresistible force in handset and tablet devices within three years. New chip designs targeting these devices will overshadow the slow deterioration (not collapse) of the PC market.
    4. Intel will augment its business with its excess foundry capacity. The company is one of the few, if only, enterprises with the wherewithal and capital to employ a "build it and they will come" strategy.
    5. Earnings growth will follow this business path. Improved earnings growth in new markets will encourage equity investors and revitalize the stock. Modest multiple expansion is a knock-on expectation.

    I have followed and analyzed Intel stock for a number of years. Seeking Alpha editors have published several articles I've written about Intel, them most recent in April 2013.

    Option Trade Rationale and Expectations

    This expiration of these options is over a year-and-half away. My thesis is that before January 2015, INTC shares will appreciate more than a dollar from today's price. This is based upon fundamental analysis of the underlying stock, the synopsis of which is found preceding.

    I believe that Intel can earn between $2.00 and $2.20 per share in 2014. If the company successfully executes its business plans, it will set in motion modest, sustainable forward earnings growth; I assume the high single digits is reasonable. Such an EPS growth profile should command a P / E multiple of at least 13x.

    If this these premises are correct, one should expect a target price of $29 a share or thereabouts. A 31 cent investment may return $4 within a year-and-a-half.

    An Additional Twist

    If I choose to hedge the downside, I could buy some puts below the January 15 $20 puts I sold. This would create a vertical spread position (also called a bull-put spread). By doing so, I would be increasing the capital outlay for controlling Intel shares, but reducing my downside risk.

    Buying these "insurance" options means that if the share price dropped below $20, the long puts would permit me to limit my potential losses to the difference in strike prices between the long and short puts, plus the cost of the long puts.

    Given my view of the risk / return, I do not plan to take this step. It is a viable action contingent upon one's view of Intel stock downside.


    I am bullish on Intel stock. The current IV is unusually low. By executing a "long combo," I can control shares of INTC stock for over 18 months, at fraction of the cost of going long; and capture unlimited upside if the share price climbs above $25. This is less than a dollar above today's market price.

    The trade risks include the consequences of the stock falling below $20, whereas I must either buy shares "put" to me at $20 each or buy back the short puts at what could be a substantial loss. I view this outcome as low probability.

    In this scenario, having evaluated the company, I believe the downside risk is mitigated by yield support and Intel's high net cash business. In the event the stock goes south, my trade plan would be to buy the shares with the expectation that they will yield at least 4.5 percent; and will be undervalued. Another risk is the shares going nowhere between now and 2015; whereas I lose a modest capital investment. I must also forego any dividends while owning the options.

    Of course, any trade plan is subject to revision if fundamental circumstances change.

    Readers: please understand that option strategies entail risk that owning long stock does not. Please do your own thorough due diligence before trading any stock or entering into any option trade. It is imperative you clearly assess your personal risk / reward tolerance before making any investment.

    Good luck with all your 2013 investments.

    Disclosure: I am long INTC.

    Additional disclosure: I am long both INTC stock and options. I have taken a position in the trade described in this article.

    Tags: INTC
    May 30 3:09 PM | Link | 5 Comments
  • Apple Management Must Fix Four Problems: What Investors Need To Watch

    Apple Inc (NASDAQ:AAPL) investors, whether current or prospective, may wish to pay close attention to four specific problems facing the company. I contend they are at the root of the negative sentiment directed at the shares and the correspondingly low valuation placed upon the stock price. Until corporate management fixes these issues, I do not expect investors will enjoy a meaningful rally in the shares.

    As an investor, I believe it is important to understand the drivers behind a company's business. Some may auger well for the share price. Others much less so. For instance, upon the second quarter earnings conference call, CEO Tim Cook spent a fair amount of airtime extolling the virtues of the Apple eco-system, customer loyalty, company mission to improve people's lives, etc. All good stuff. However, I do not believe much of it will advance the price of the stock.

    I submit here's four key investor issues, that as they are resolved, will move the stock price:

    • Margin Compression
    • Declining Earnings
    • Perceived Innovation Vacuum
    • Too Much Balance Sheet Cash

    Let's examine each one.

    Margin Compression

    Gross margin represents net sales less the direct costs associated with producing the goods and services sold by a company. It is commonly expressed as a percentage. Historically, AAPL has enjoyed very high gross margins. In the Tech industry, fierce competition makes retaining such numbers difficult.

    Here's a five-year chart showing Apple's quarterly gross margins:

    (click to enlarge)

    courtesy of

    Since the 47.4% peak captured in the quarter ending March 2012, the figure has fallen to 37.5% in the most recent quarter. Management has forecast a drop in gross margin to 36.5% in the upcoming quarter ending June 30.

    Until gross margin stabilizes, the Street will conclude that it will continue to ease, thereby slowly eroding earnings and cash.

    What can fix the problem? There are two ways. First, product costs and mix could change and rekindle higher margins. Alternatively, higher revenues can overshadow declining GM. The math for this fix is somewhat challenging, but plausible.

    Let me illustrate the hurdle. Last quarter, Apple recorded a dollar-denominated gross margin of $16.35 billion on net sales of $43.6 billion (or a 37.5% margin ratio). A two-and-a-half point GM ratio increase, equating to a 40 percent margin would have generated $17.44 billion. In order for Apple to generate equivalent 40 percent gross margin dollars, it would have been necessary for the company to net $46.5 billion in sales, an increase of $1.09 billion; or a 6.7 percent uplift from actual. Actual sales were up 11 percent QvQ.

    Declining Earnings

    A close cousin to declining margins are Apple's declining earnings per share. Here's the facts:

    (click to enlarge)

    (Estimates from ameritrade consolidated forecasts)

    Indeed, EPS has declined the last two quarters, and is projected to decline for at least the next two. Furthermore, on the conference call last week, Apple's management set expectations that the QvQ third quarter earnings decline will accelerate versus the 2012 comp.

    In my previous S.A. article about Apple stock, the theme was that the AAPL price / earnings multiple was an anomaly. At 9x, it was just too low. A P / E at this level indicates the market believes the company has no future earnings growth potential. While my opinion remains that the market has overstated the longer-term case, it appears it is very well correct in the short-term: Apple's earnings are expected to contract through the remainder of this fiscal year.

    Until earnings stabilize and both management and the Street begin to anticipate earnings growth again, the stock price is unlikely to move up quickly.

    Perceived Innovation Vacuum

    Under the late Steve Jobs, Apple Inc rode wave of customer and investor enthusiasm over his innovative capabilities and adherence to perfection. Since his departure, the company's ability to innovate has been called to question. Whether this true or false is mostly irrelevant.

    In the investment world, sentiment and perception become reality.

    Of late, one could argue that Apple has simply built upon previous breakthrough products: i.e., the iPhone and iPad.

    Unquestionably, management has refreshed these devices with added features and improvements. However, they are still the same basic devices. These products, built upon incredible foresight and attention to detail, carried tremendous customer loyalty and high margins.

    Quite simply, new CEO Tim Cook is being called out by Wall Street. He's being asked to amplify his role as an outstanding operations man into a visionary leader. I am not yet questioning his ability to do so. Nonetheless, the results have not materialized. Thus far, all sizzle and no steak.

    Apple management must bridge the perceived innovation gap with some sort of product breakthrough. Otherwise, it is reasonable for the company to accept lower Street expectations built upon the premise that while the company remains an exceptional production, distribution and branded business, the days of unparalleled enterprising innovation and leadership may be ebbing.

    Too Much Balance Sheet Cash

    Previously, Apple's unusually high balance sheet cash and liquid investments were an asset. Steve Jobs' ferocious defense of the cash hoard was accepted due to his aura and a rapidly rising stock price. Sure, some investors murmured about the billions on tap, but they largely kept their mouths shut at shareholder meetings and corporate functions.

    No more.

    A plummeting stock price and weakening associated metrics have changed all of that.

    Upon the most recent conference call, management and the board of directors got the message. They delivered some relief: a fifteen percent dividend increase and a 32-month, $60 billion stock buyback program.

    My view is that these items may help create a floor under the stock price. They are not silver bullets.

    The dividend was set such that it created an approximate three percent yield on the underlying stock price: admirable, respectable, but not earth-shaking. There are many 3% yielding stocks that have better near-term earnings growth potential.

    The buyback plan is somewhat impressive if for no other reason than its sheer magnitude. However, it's spread out until the end of 2015. In the meantime, let's assume that AAPL generates an average of $8 billion in free-cash-flow (operating cash less capex) per quarter, or $88 billion through the 11 quarters in the period. Here's a chart of Apple's FCF over the past five years, outlining why I suggest this figure is defensible:

    (click to enlarge)

    courtesy of

    Now let's premise that the dividend is raised annually by ten percent in 2014 and 2015. Therefore, the cash dividends paid will be about $42 billion between now and the end of 2015. Here's the all-in math:

    Apple Balance Sheet Cash / Investments 2013 - 2015

    (click to enlarge)

    Certainly a step in the right direction, but evidently Apple management is intent on retaining the bulk of the current cash hoard. And while the stock buyback will retire up to four or five percent a year of shares outstanding, additional shares will be issued to management and employees in the form of options and restricted stock, thereby diluting the effort; at least to some extent.

    Clearly, corporate leadership has begun to address this issue, but I do not believe it's "case closed" yet. In addition, I submit that Apple management could do itself a favor by taking a page from the Intel (NASDAQ:INTC) playbook: invest the cash in a way that provides a better return. FY2012 10-K filings show a return of only 1.03 percent.

    The Bottom Line

    Apple management faces four key investor issues: margin compression, declining earnings, an innovation vacuum, and a huge amount of balance sheet cash / investments. Investors may wish to pay particular attention to these issues for clues as to how the business is performing, and the consequent movement in underlying share price.

    The problems are inter-related.

    Margin compression is a prime contributor to declining EPS. It is also a result of increased competition and the dearth of new "breakthrough" products since the passing of Steve Jobs. Potentially, these problems may be overcome through significant higher revenues. However, one may premise that such revenues are contingent and circle back to the need for new, breakthrough products. Finally, exceptional balance sheet liquidity has evolved from a corporate source of pride to a millstone around management's neck. The recently announced dividend increase and stock repurchase plan is a fine first step, but I suspect that these steps alone will do more to place a floor under the shares than drive its capital appreciation.

    For longer-term investors, I suggest that AAPL stock remains undervalued as a function of its current 10x earnings multiple. This multiple assumes low forward multi-year EPS growth: in the neighborhood of two or three percent. This may prove far too pessimistic.

    Nonetheless, without resolution of the foregoing problems, investors should not expect much enthusiasm for the shares, nor a rapid return to the ever-buoyant stock prices of 2008-2012.

    Disclosure: I am long AAPL, INTC. 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
    Apr 29 10:43 AM | Link | Comment!
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