Streetwise

Lauren Rudd

Sunday, August 11, 2013

Apple Could Ride the Waves of the Markets

The din emanating from the naysayers and prognosticators on Wall Street is deafening, producing a flourishing contagion of economic and financial hysteria. Yes, we have been teetering on the brink of an economic precipice, one heartbeat away from disaster. However, due to the unprecedented actions orchestrated by the Federal Reserve, we have moved back from the brink and avoided Armageddon.

Had the Fed not acted, the Great Depression of 1929 would have been relegated to the status of a tea party (no pun intended). Moreover, the future looks to be a heady one. For example, there have been a number of comparisons between Wall Street today and the bull markets of the eighties.

Wall Street strategist Richard Bernstein commented that, "The current bull market might be one of the strongest of our careers, and could potentially rival the 1980’s bull market."

Of course the opposite could also be true, meaning that stock prices are enjoying a pleasant but unsustainable upside interlude, pushed aloft by the easy money from central banks as companies unduly flatter their results with miserly cost-cutting, cheap debt and stock buybacks.

As of now my vote is for the glass being half-full, meaning I believe the markets will continue their upward march for the foreseeable future, notwithstanding a few inevitable corrections along the way.

One company that could easily ride the wave upward, while managing the troughs is Apple. When I last wrote about the company a year ago, my earnings estimate for fiscal 2012 was $28 per share, with a 12-month projected share price of $500. The share price back then was $363.

So how did the company do? Fiscal 2012 earnings came in at $44.15 per share and the shares recently closed at $465.25. For fiscal 2013 third quarter ended June 29, Apple posted quarterly revenues of $35.3 billion and earnings of $7.47 per share.

The Company also generated $7.8 billion in cash flow from operations during this past quarter and returned $18.8 billion to shareholders through dividends and stock buybacks. Nonetheless, the numbers were certainly a bit less than the $35 billion in revenue and $9.32 per share in earnings posted in the year-ago quarter.

So, looking ahead can we expect the rebirth of a Phoenix; or a company whose shares have little in the way of potential going forward? Keep in mind that Apple sold 31.2 million iPhones, as compared to 26 million in the year-ago quarter. But Apple also only sold 14.6 million iPads during the quarter, compared to 17 million in the year-ago quarter and 3.8 million Macs as compared to 4 million a year ago.

Apple’s Board of Directors recently declared a cash dividend of $3.05 per share. As part of its fourth quarter guidance, Apple expects revenues of between $34 billion and $37 billion with a gross margin of between 36 and 37 percent and operating expenses of between $3.9 billion and $3.95 billion.

Since the start of July, Apple’s shares are up nearly 19 percent, although they are still down almost 12 percent since the start of 2013. Nonetheless, you can almost sense a perceived air of change. While Steve Jobs was undoubtedly a key driver behind Apple’s past successes, Apple has a cadre of phenomenal talent on its payroll, including Tim Cook, Apple’s current CEO.

The competitive environment in which Apple operates has changed significantly since Jobs passed on. The question is whether Apple can change enough to ensure its ongoing success. I believe it can.

Moreover, the intrinsic value of the shares using a discounted earnings model with a growth rate of only 3 percent and a discount rate of 15 percent is $514. Using the Street’s 5-year average growth rate of 13.75 percent and the intrinsic value rises to $1,141.

The more conservative free cash flow to the firm model produces an intrinsic value of $714 with a 3 percent growth rate and $1,580 if you increase the growth rate to 13.75 percent.