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Richard Evans spent 26 years in the military, Business and Management as well as marketing within the retail, transportation, education and health care fields. He now lives in Las Vegas.  He writes extensively, having several hundred articles published on financial and travel topics as well as... More
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  • Does Apple Have Worms? 0 comments
    Oct 8, 2012 10:29 AM | about stocks: AAPL

    Apple (NASDAQ:AAPL) is now the largest company in the world by market cap, with a share price $650 off a ludicrous PE of 15.3. The recent iPhone-5 launch sold 5 million units the first weekend. This Apple is big, red and juicy. Be careful before you bite. It may have worms.

    One year after CEO and iconic visionary Steve Jobs died I look at Apple and I hold three concerns. First, some background:

    When Jobs passed away, my biggest question was how would the company, corporate culture and future success be impacted by the loss? By all reports Jobs was a micromanaging perfectionist, always driving to make each new product a wow event. Looking at Apple on October 5, 2011, I trusted that there were a number of new products in the development pipeline. I assumed they would be awesome in the Jobs/Apple tradition. But where would things go as time went on and the touch of the masters hand faded?

    In 1985 Apple was riding a wave of popularity as products like the Macintosh and the Laserwriter had transformed computing. Jobs was forced out of the company board who wanted a manager to run the burgeoning empire. Jobs went out and became involved in a pair of companies called NeXT and Pixar.

    By 1996 Apple was on the cusp of bankruptcy as products lost the wow factor. The impression from many (myself included) was that Apple was making too many corporate decisions. Quality was down. Functionality, always a Jobs/Apple hallmark, was deteriorating. The software was becoming increasingly clunky. As the storm clouds grew the company reached out and bought out Job's NeXT to use the innovative operating system Jobs had overseen in development. They brought in Jobs as an "advisor" and his roll quickly became CEO for the second time.

    Jobs brought Apple back from the abyss, again impressing his demand for innovative excellence at every level. In 2012, shortly after his death, Apple price topped $700 a share.

    AAPL Chart

    AAPL data by YCharts

    One year after his death it closed at $652.59. Even as late as 2009 I could have picked up Apple for around $140. A host of naysayers were saying then it was overpriced. A new host are bashing Apple, however from a fundamental standpoint it looks dazzling. Earnings per share are a monstrous $42.54 for a PE of 15.3. Quite reasonable for a company that has been growing well above 20% per annum. It initiated a "small" dividend of $2.65 per quarter for a yield of 1.62%. The best thing I like is the more than $27 billion in cash it is sitting on. That is quite a war chest.

    But a year after the Master's death I have concerns:

    Apple TV

    I have been hearing about Apple TV/i-TV for two years. The story is it will be a product that will revolutionize the way we use home entertainment in the same way that Apple revolutionized personal computing (Mac/iPad) and personal electronics (iPod). It will be out by 1Q 2012, no wait, 2Q 2012, err, well now entering 4Q 2012 we know it will not come out at all this year because of contractual and integration problems with cable and television networks.

    In any case the longer the Apple TV stays out of stores the more I worry it will never arrive - or be a disappointment when it arrives. Why? Well looking at...

    IPhone5 Map Fiasco

    Some Apple products have been more flash than substance, but everything that came with it under Jobs was incredible useful. For example the original Mac was a wonder, even if it was pricey. Its biggest weakness was its lack of software options and applications. The applications it had was mostly quality.

    Then came the iPhone-5, critics and users gushing about it, except the mapping app which couldn't even map whole continents. It was egregious quality control, a corporate decision (replacing Google Apps) trumping user functionality. True, it was just one wretched item within a marvelous product. One worm can sneak into even the best managed orchards. The question is will there be more?

    China

    Apple's products are primarily made in Asia, specifically China, and that country is having its own problems. Economic doldrums and growing dissatisfaction with elite corruption has lead to a remarkable series of strikes and protests over 2012. Foxconn, the Taiwanese electronics producer that makes a lot of Apple product has been hit by several strikes and closures over pay and working conditions.

    Meanwhile the Chinese government seems to have been tacitly condoning often times violent protests against Japanese firms. How much has this been to support China's diplomatic actions and how much to refocus worker discontent on an external problem is hard to tell. This seems to increase the danger of problems against foreign firms, whether American or Taiwanese. So far the main parties say that problems in China have not impacted Apple supplies, however initial sales of iPhone-5s fell millions short of analyst expectations, primarily due to lack of inventory.

    The Bottom Line

    This does not mean that Apple is about to implode. It has a raft of technologically innovative products working under a remarkable operating system. It has a massive moat in that Apple customers are extremely loyal, even fanatical about the products. In fact I have no doubt that profits will rise, the dividend will advance, and with the incredibly important 4Q and holiday season upon us, Apple will gush out record sales and profits.

    The problem is what happens next? Apple's smartphones and related products make up 43% of the company's revenues for 2011 and I expect that ratio to increase slightly for 2012. It is a market in which Apple has to come out with a new product every year to keep the market place excited and sales up and moving. Every year a new astonishing iPhone needs to come out to keep Apple the juggernaut it has been. Will the inheritors of Steve Jobs keep the quality fruit coming, or will we start to see too many worm-ridden fruit?

    The Apple I see is big and luscious and ripe. There are a few worms. Will there be more?

    What do you think?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: AAPL
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