Wednesday, February 11, 2015

Briefly… Why I’m Bullish On Apple

What analyst Brian White at Cantor Fitzgerald calls a “super cycle” I call the “Apple iPhone Echo Effect.” The success of the iPhone 6 handsets is far-reaching and will continue through the release of the successor flagship handsets next fiscal year.

The unified and uniform eco-system Tim Cook lauded in his commentary yesterday at the Goldman Sachs  Technology and Internet Conference is unrivaled and can not be matched. The IBM agreement will act as a “booster rocket” on enterprise sales.

Due to the market’s consistently conservative valuation of the company, Apple has been able to repurchases just over 1 in 8 fully diluted shares since the peak split-adjusted share count in FQ4 2012. That’s even considering the averaging of the fully diluted share count in the December quarter. The annual cash savings at the current dividend rate from the repurchases is now about $1.425 billion (and rising).

Because Apple averages the fully diluted share count each quarter, any quarter in which repurchases occur, the repurchases will have a residual and beneficial impact on the eps growth rate in the following fiscal year’s corresponding quarter. In other words, the share repurchases have a “pair of legs.”

As revenue growth rates reach double digits, the rate of growth exceeds the rate of growth in operating expenses which delivers a higher percentage of revenue to the net income line. This will likely be the case at least through the March quarter of FY2016. This will boost net income per revenue dollar with an amplified impact on eps from the share repurchase program.

While it’s common to view Apple’s growth in percentage terms, even if revenue and earnings growth rates begin to moderate beginning in FQ3 2016, the volume of revenue and earnings growth need to be considered. The cash generation, even at more moderate rates of reported growth, will continue to generate cash at volumes to support a significant and ongoing capital return program.

Combine the “Apple iPhone echo effect” with the release of the Apple Watch and the surge in revenue and net income in just the first four quarters after the new product line is released is not factored in current analyst estimates.

There isn’t a competitor on the planet that can successfully design and deliver a wrist-based digital device on the scale of Apple or with full compatibility with hundreds of millions of smartphones.

Again, the market and consumers the world over are currently expecting a “watch.” The only resemblance the Apple Watch will have to a watch is that it will tell time and it will be attached to the wrist. That’s why I call the Apple Watch the “ultimate skeuomorph.”

More on my bullish stance in a future post.

Robert Paul Leitao