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Craig Allen: Apple IS Different, But Is Different a Good Thing?

Beware a tendency of holding a stock for emotional reasons, and not on fundamental and technical strengths

By Craig Allen, Noozhawk Business Columnist | @MPAMCraig |

The mantra on Apple recently has been; Apple is different. This is true in so many ways, but is different always a good thing? Not when it comes to investing!

Apple does do things differently from most other companies. In fact, I think Steve Jobs started the company specifically because he was different. The term “thinking outside the box,” if it wasn’t invented by Jobs, aptly described his approach to just about everything he and Apple have done throughout the company’s storied history. Being different can be great. It is exciting; refreshing, and yes, different from the norm. But being different only works when you’re performing consistently well. If you slip at all, the punishment can be severe.

We love athletes and rock stars because they are different — they don’t play by the same rules as the rest of us. But, in the same way, if these individuals make a mistake, the consequences can be harsh and can take years to overcome (if ever).

In Apple’s case, its numbers have been consistently phenomenal, and its latest quarter is no exception. For Apple’s fiscal second quarter (more on this difference below), the company reported revenues of $39.2 billion, $11.6 billion in profit, with 35.1 million iPhones and 11.8 million iPads sold during the quarter. It reported a unit increase for iPhones of 88 percent year-over-year; for iPads, the increase was 151 percent. The official iPhone numbers considerably exceed the expectations of analysts, who were looking for only about 30 million, but iPad numbers were about 1 million units light.

Sales for Macs were about 4 million, a 7 percent increase; and they sold about 7.7 million iPods, a 15 percent unit decline. Gross margins were an impressive 47.4 percent compared to 41.4 percent in the year-ago quarter. International sales accounted for 64 percent of the quarter’s revenue. Apple’s third quarter 2012 outlook calls for $34 billion in revenue and diluted earnings per share of $8.68. iPad sales increased 151 percent during this most recent quarter, over the second quarter of 2011.

Apple’s earnings for the quarter were $12.30, well above analyst expectations of $10.04 per share. The company’s P/E (price to earnings) ratio on a trailing 12-months basis is 14.8 times. This is in line with the computer hardware industry and is actually significantly lower than the technology sector (19.9 times) and the Standard & Poor’s 500 (18.6 times). On this basis, Apple looks pretty cheap, despite its $603 closing price and a market capitalization of $564 billion making it the most valuable company on the planet.

But stocks don’t trade on historical performance. Instead, investors are more concerned with what the company is going to do in the future, and it is those future expectations that drive stock price performance over time. So where does Apple go from here?

According to the analyst consensus estimates, Apple is expected to earn about $49 over the coming four quarters, which would give it a forward P/E of 12.3 times — a bit less of a bargain when compared with the computer hardware industry (9.9 times), but at about the same discount when compared to the technology sector (15.4 times) and the S&P 500 (15.4 times).

Apple has had a long history of providing guidance on their quarterly performance that is very conservative. In other words it sandbags the street, which tends to bring analyst estimates down, and then consistently beat their guidance, reporting better-than-expected numbers. This is exactly what happened this past week. The stock had actually fallen from a high of $644 per share on April 10 to an intraday low of $555 on April 24 24, the day it reported earnings after the market close. Once again, Apple beat analyst estimates, and the stock soared, jumping about 10 percent right off the open Wednesday, before retreating a bit to close up $50 per share for the day, or by 8.9 percent.

Conservative guidance and a fiscal year that is off from most other companies (Apple’s fiscal first quarter is the fiscal fourth quarter for most other companies, October through December) are just two of the many differences that have made Apple a bit of an enigma as an investment over the years. I can remember a time years ago, before the iPod, when it appeared that if Apple didn’t sellout to Microsoft or some other larger company, it was going to fade into history. In my opinion, and this is shared by many, it is Steve Jobs that was the true difference.

As I stated above, it is future performance that really matters in the stock market. Rather than “What have you done for me lately?” it’s “What are you going to do for me tomorrow?” My feeling is that without Steve Jobs driving the bus, Apple will not have the revolutionary products to maintain the stellar revenue and earnings performance that has propelled the stock to such lofty levels to date.

More to the point, if it is are not able to continue to surprise us every quarter with blowout performance, the stock will very likely get hammered. One need only look at the 13.8 percent drop Apple share suffered immediately prior to this latest earnings release, which was sparked by rumors that it might not have those blowout earnings we have all become so accustomed to over the years.

If Apple does not continue to surprise us consistently, quarter in/quarter out, I believe investors will drop it like a bad habit, precisely because it has been so different. Apple has become personal to investors. Many people own the stock simply because they love their iPhone, or because all of their friends own it, or because they feel like Apple has consistently done things its own way, regardless of the consequences. When investing decisions become based on emotions or fads, and not on fundamental and technical strengths, the risk of dramatic crashes increases exponentially.

Even if Steve Jobs were still at the helm, at current valuations, I would still be very wary of owning Apple (I don’t own it). Without him, I have almost zero confidence that the company can do what it will take to keep the stock where it is today, much less drive it to even higher levels. Investors have to ask themselves: Do I really believe that Apple can go significantly higher than where it is today, and what is it going to take to make that happen? If you own the stock and cannot answer this question with reasonable, logical and specific supporting information, such as revolutionary new products that will be released that are equivalent to the iPhone and iPad, you must question why you are holding onto the stock.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.




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» on 05.01.12 @ 12:14 AM

Gutsy call. My problem with the stock is that they price their products at almost twice as much as their competitors. So unless their products continue to be much better than PC’s or Android phones, people are going to get tired of contributing to their extraordinary profit margins. You can’t price your products and ignore the market if you don’t maintain a technological edge. It will be interesting to see if the iphone 5 is a major advance or slightly modified version of the current phone. Anything less than a revolutionary breakthrough could be the first sign of Apple’s demise.

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