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Michael Fu
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4 years in corporate finance and 7 years in investment banking (Bear Stearns, Deutsche Bank, Bank of America Merrill Lynch). MBA from Kellogg School of Management (Northwestern University), BBA from University of Michigan (Go Blue!), and CFA charter holder. Raised in Omaha, Nebraska. Have been... More
  • Apple: Buy Or Sell? 0 comments
    Aug 2, 2012 7:10 AM | about stocks: AAPL

    Apple's recent earnings miss. Apple vs. Samsung lawsuit. iPhone 5 rumors. cheap valuation (10-12x P/E). $115 billion cash balance. $600 per share and $550 billion market cap, the largest market cap company. Is Apple a Buy or Sell? Let's look through the facts:

    Valuation (at a stock price of $600): market cap ($565 billion), 2012 sales ($150 billion, 3x sales multiple), 2012 EPS ($50.00, 12x P/E multiple), cash ($118 billion, or 21% of market cap, or $125 cash per share), no debt

    Dividends/Stock Buybacks: $10.60 annual dividend recently initiated with first shareholder record date of August 13, 2012 (1.8% dividend yield, 20% dividend payout ratio), $10 billion stock buyback authorized (approx. 10% of cash balance)

    Market Share: Mobile Worldwide (12.5% Samsung, 7% Apple), Mobile U.S. Only (Samsung 26%, Apple 14%), P.C. Worldwide (6% Apple), P.C. U.S. Only (11%)

    Business Segments: iPhone (38% of sales), P.C. (28% of sales), iPad (12% of sales), Others including iPod, iTunes, Software, Peripheral (20% of sales)

    Growth and Margins: Revenue growth of 15-20% (2Q2012 Revenue grew 23% year on year). Gross Profit Margin (40%) and Net Profit Margin (25%)

    Risks: Sales, profits and overall success of Apple heavily depends on the success of the next iPhone 5 (rumored to announce on September 12, 2012). iPhone currently comprises 40% of sales and 60% of profits.

    Conclusion: Apple looks like a Buy in my opinion. It is very rare to find a company/stock that has 40% gross margins and 25% net margins, with revenue growth of 15-20%, that currently trades at only 10-12x forward P/E. Add to that, the 1.8% dividend yield and $125 cash per share , and you've got a once-in-a-lifetime value stock (no wonder David Einhorn of Greenlight Capital is long Apple).

    Target Price: A stock with 15-20% sales growth typically would trade closer to 15-20x P/E as a fair valuation. Note some growth stocks trade at P/E multiples up to 2x sales/eps growth, but let's not get greedy. At $50 EPS per share, a fair 15-20x P/E valuation would imply a target stock price of $750 to $1,000 per share (25-65% upside).

    But as highlighted above, the product risk of the success of the next iPhone 5 is a real concern. Given iPhone comprises 40% of sales and 60% of profits, a mis-step on the next iPhone model could be very costly to Apple shareholders.

    Risk Mitigation: One way to mitigate that risk would be to purchase insurance: Buy Nov 2012 put options at say strike price of $500, to limit your downside to only 15-18%, in that very unlikely scenario that iPhone 5 is a total miss with consumers. The put would only cost you $7 / share, or about 1.2% the cost of an Apple stock ($600 / share).

    Disclosure: I am long AAPL.

    Stocks: AAPL
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