Apple: Back To Basics And Quite Compelling

| About: Apple Inc. (AAPL)
This article is now exclusive for PRO subscribers.

I have had plenty of rocks tossed at my past articles on Apple (NASDAQ:AAPL), and whether they were deserved or not, it certainly showed the fierce loyalty that Apple shareholders and consumers have towards the company and the stock. This previous article outlining my strategy actions was panned. This strategy article was a bit early, but as it turned out, could have been helpful. What seems to be missing right now arouns Apple are the basic facts about the company and why the stock is compelling from the buy side.

The Basic Facts And Fundamentals

Apple has a history of underpromising and outperforming their own forecasts. Most analysts are on to this little game and tend to go higher with their own forecasts. That places Apple in an awkward position whenever they review their earnings performance, and proceed to announce their future forecast once again.

Sort of like the boy who cried wolf, and finally nobody paid attention. For this reason, I believe that it would be prudent for investors to brush aside those forecasts for a moment and take a really good look at the company and the fundamentals.

This chart says a lot. First, the share price has dropped like a rock since mid-September by almost 20%. That is a correction, and the "bad" news (if you can call anything Apple does "bad") has already been baked in. My opinion of course and anything could happen, but I think the downside is limited now.

Secondly, the P/E ratio has nosedived as well. From 15 down to 13, which has always been ridiculously low for a growth company in the tech sector anyway. Now that the P/E is 13, by placing a 20 P/E ratio on the stock we can come up with a share price over $750/share. Forget the enterprise value for a moment, because that is simply a reflection of the share price. Take a look at the incredible margins achieved; over 40%, and note the cash from just this last quarter of over $9 billion socked directly into the cash register.

Those numbers are astounding but the company has taken a huge hit due to superfluous issues.

  • Supply constraints have impacted the numbers. While this is not good, it does not mean that products are not selling. It means that supply cannot keep up with demand yet.
  • Sales have not been as robust as the talking heads would have liked to see. So instead of 7-8 million iPhone 5's sold, only 6 million hit the books. Folks, in one month, those numbers are still striking and the revenues and profits will only gain momentum.
  • The iPad mini had a lukewarm reception. Okay, but this is probably a temporary situation and might even be good news for the regular iPad. Less cannibalizing means that the iPad mini might do precisely what Apple wanted it to do; create another category for exponential growth. We will find out this holiday season how this continues, but to me, it is a win-win.
  • The Tim Cook comparisons to Steve Jobs are ridiculous at this point. He is not Jobs, he is Cook. The company is bigger than one person now anyway, and he will get better as time goes on. Tim Cook is no slacker. The guy is brilliant but different. Do we need to see his birth certificate for crying out loud?

Let's look at the numbers:

  • $156 billion in revenues this quarter.
  • 27% YOY revenue growth.
  • $44 billion in gross profit this quarter.
  • 24% YOY earnings growth.
  • Zero debt.
  • A forward P/E of 9.8.
  • Nearly 70% institutional ownership of all outstanding shares.
  • A dividend yield of 1.85% at the current share price.
  • A 6% payout ratio that could easily mean significant increases in the dividends given.

I don't know about you, but all things considered, these facts, and cold hard numbers, are now telling me that this stock could produce profits by taking some action now.

Actions Suggested To Consider

I myself sold the January 500 put options. I pocketed the premium and if the stock drops to $500/share I will own actual shares. As of now, I will be considering buying the January 2014 call options, 575 strike price.

575.00 AAPL140118C00575000 82.15 Down 10.65 81.00 82.65 165 684

This glimpse is from Yahoo!Finance and at about $8300/contract, I believe I will profit significantly as the share price in Apple recovers.

If you already own shares you might want to consider adding at these levels, or selling put options to earn some premium profits, such as I did previously.

The April 2013 500 strike price put options can put some money in your pocket right now by selling them. You need to be prepared to take ownership of the shares if the stock drops another 15% (to $500/share) by the option expiration date, or buy back the options at the last moment possible to avoid having the shares put to you.

500.00 AAPL130420P00500000 21.25 Up 4.35 20.50 21.45 109 3,351

*This glimpse is from Yahoo! Finance also.

Selling this put option puts about $2100 per contract into your account immediately. I only suggest this action if you truly want to own Apple shares at $500/share. Remember also that once you implement this action, your cash or margin dollars will be frozen for the cost of actually buying the shares of the stock, until the action is expired or reversed.

The Bottom Line

I believe that Apple is very compelling and could be quite profitable. Consider buying at these levels for the long term.

Disclosure: Sold Put options and am considering buying Call options next week.. 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.