Thursday, February 12, 2015

Apple And The Irrelevance of Trailing 12-Month Earnings

In Apple’s December quarter (FQ1 2015), revenue rose 29.53% on a year-over-year basis to $74.599 billion. On a sequential basis, the revenue growth rate was 77.10%. This was the fastest rate of year-over-year revenue growth since the March quarter of FY2012. The sequential revenue growth rate surpassed the 63.89% rate of growth in the December quarter of FY2012 (FQ1 2012). 

The graph below illustrates the dramatic rise in revenue in the three-month period ended December 27, 2014 (FQ1 2015). 

In the same quarter earnings per share rose 47.83% year-over-year and on a sequential basis earnings per share rose 115.49%. This was the fastest rate of year-over-year earnings per share growth since the March quarter of FY2012 and the sequential earnings per share growth rate was the fastest rate of growth in the company’s recent history. 

The graph below provides a perspective on Apple’s earnings per share growth rate, amplified by the ongoing share repurchase program, relative to the rates of growth over the most recent twenty five fiscal quarters.

For the current fiscal year, I am targeting revenue of $235 billion (inclusive of the successful launch of the Apple Watch in April). At 28.56% revenue growth, FY2015 would deliver the fastest rate of revenue growth since the 44.58% revenue growth rate in FY2012. Assuming no less than 23% of revenue flows to the net income line and Apple reaches my current revenue target, net income would reach $54 billion and an eps outcome well above $9 per share. 

Using $9 per share as an example, at the closing price of $126.46 on February 12, 2015, the shares are currently trading at just over 14 times estimated FY2015 earnings per share. This contrasts with the price earnings multiple of 17.12 times trailing 12-month earnings as of this February date. 

In my view, net income and the rate of net income growth are the primary drivers of Apple’s share price appreciation. The company is in only the second quarter of what may be a six-quarter epoch of accelerated rates of revenue and earnings growth. Looking back and using 12-month trailing earnings as a guide at this point in time will only obfuscate the potential for share price appreciation moving forward.

At this point in time, trailing 12-month earnings is an irrelevant metric. Net income and net income growth over the next several quarters amplified by the ongoing share repurchase program are where Apple watchers should cast their gaze. 

Robert Paul Leitao