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Do Trees Grow To The Sky? A Study Of Apple’s Financials

|About: Apple Inc. (AAPL)

Given that the stock price has crossed $600 and the market capitalization is inching towards the $600 billion mark, Apple (AAPL) merits a study of its financials. Since Q2 2007 i.e., Mar-Jun quarter of calendar year and NOT Apple's financial year, which is Oct-Sep; when Apple began publishing its cash flow statement in its press release, investors have reacted rather strangely to the announcement of quarterly (and annual) earnings.

The following table uses three "independent" variables - sales, net profit and cash from operating activities. It attempts to capture, the shock/surprise of the investor, primarily through the percentage change in price.

Price % = (Day closing price after announcement/Day closing price before announcement) - 1.

The percentage change of the independent variables is calculated as YoY (year-on-year). That is, Q4 2011 sales jump of 73.27% would mean that Q4 2011 sales were 73.27% more than that of Q4 2010. After all, these are the numbers that get mentioned in the press release i.e., comparison at a similar time frame during the previous year.

 

Sales %

Profit%

OCF %

Price %

Q2 2007

23.80%

73.31%

223.95%

6.37%

Q3 2007

28.53%

66.79%

146.40%

6.77%

Q4 2007

35.04%

57.47%

53.72%

-10.65%

Q1 2008

42.71%

35.71%

56.26%

3.71%

Q2 2008

37.97%

31.05%

40.46%

-2.57%

Q3 2008

26.99%

25.66%

75.43%

5.88%

Q4 2008

5.82%

1.52%

41.30%

6.68%

Q1 2009

8.67%

15.31%

20.08%

3.20%

Q2 2009

11.70%

14.65%

32.97%

3.45%

Q3 2009

25.02%

46.57%

5.87%

4.69%

Q4 2009

32.01%

49.80%

46.80%

1.41%

Q1 2010

48.60%

89.75%

69.72%

5.98%

Q2 2010

61.29%

77.95%

83.17%

0.93%

Q3 2010

66.65%

70.14%

83.04%

-2.68%

Q4 2010

70.51%

77.74%

69.05%

-0.53%

Q1 2011

82.73%

94.76%

97.16%

2.42%

Q2 2011

81.98%

124.65%

109.88%

2.67%

Q3 2011

38.97%

53.74%

101.82%

-5.59%

Q4 2011

73.27%

117.59%

79.62%

6.24%

What should be the take-away from this data? Running multi-linear regression on the data, where we attempt to "base" the dependent variable price on the independent variables - sales, net profit & operating cash flow, we hit the answer as

Price % = -0.12*(Sales %) + 0.07*(Profit %) + 0.007*(OCF %) + 2.5

Voila! The day after the announcement, the price increases by 2.5% irrespective of sales, profit or operating cash flow. Sign of a bubble?

Another indicator to look at would be the price/sales percentile chart. Here, the ratio of market capitalization to sales is expressed in percentile terms, to get an idea of how the stock has fared historically and statistically. If the chart breaks below the 10 percentile mark, historically, it has stayed in the zone, for only 10% of the time, suggesting a buy. Of course, this metric is not to be followed blindly, as it takes only sales into the account and assumes "going concern" axiom (That is, the business is still operational). Conversely, the 90 percentile, suggests a sell. As a thumb-rule, this can be tweaked to buy when below 50 and sell when above 50.

The current stat for Apple is 12.43, having just breached the 50th percentile, suggesting a sell

P/S

10%ile

30%ile

50%ile

70%ile

90%ile

12.43

5.49

10.22

12.32

14.88

20.79

So, two "statistical" indicators suggest that a bubble is building up and it might be wise to exit the stock. However, a bubble can get "bubblier" and the stock price can hit $3000! After all, as Keynes famously said "Markets can remain irrational longer than you can remain solvent"

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