After The Rebound: A Look Ahead For Apple Stock
Through the first 15 weeks of 2014 Apple (AAPL) continued its lagging performance from last year, losing 6.5% while the S&P 500 and its technology subsector posted slightly positive
price gains. All that changed in late April when Apple released its fiscal second quarter results. iPhone unit sales grew 17% year-over-year, pushing revenue for the phone segment
up 14%. Overall company revenue grew at a solid 5% rate. And market sentiment shifted.
AAPL data by YCharts
Since bottoming out late last June, Apple shares are up 60%.
In the quarterly earnings release Tim Cook once again delivered his promising pipeline message: ““We’re eagerly looking forward to introducing more new products and services
that only Apple could bring to market.” A month later we finally got confirmation of the Beats deal; a move that is more about rebooting Apple’s music initiative (iTunes has been a
drag) through Beats’ promising streaming subscription model than the trendy headphones.
And Apple is expected to soon announce -- possibly as early as next week’s WWDC conference -- a larger iPhone 6 and the much-anticipated iWatch. While short interest is waning, potential upside from this juncture may be limited. UBS recently increased its price
target to $700 a share with Deutsche Bank and Baird coming in at a $650 target. The UBS target is just 10% above where Apple was trading recently. Not exactly a massive bet on
game-changing releases.
That said even after the big price jump, Apple is not an expensive pickup when measured against S&P Capital IQ’s estimate of the S&P 500 currently trading at 16x 2014 earnings and
the info tech sector at 15.5x. With its huge cash position, it's nice to look on a PE ratio less cash basis:
AAPL Price to Earnings Less Cash (TTM) data by YCharts
And Apple is in the midst of a large shareholder return initiative; in its second quarter (ending March) it doled out nearly $21 billion in dividends and share repurchases, pushing its
shareholder yield above 10%.
AAPL Net Common Buyback Yield (TTM) data by YCharts
At the late April earnings announcement Apple announced the shareholder gravy train will continue to flow mightily: it upped its capital return program to $130 billion by the end of
calendar year 2015, with $90 billion coming from share repurchases. Unfortunately, those buybacks are now coming at a 20% premium to the share price on the date of the announcement. Granted, as shown in the earlier chart, Apple isn’t expensive, but it’s
decidedly less cheap than it was.
Yet management needs to figure out a way to spend more money, as its free cash flow per share casts a huge shadow:
AAPL Free Cash Flow Per Share (TTM) data by YCharts
Over the past 12 months free cash flow was $46 billion. And that wasn’t even a good year.
Moreover, as staggering as the recent returns of capital have been to shareholders, Apple’s current $150 billion in cash on hand is $15 billion more than it had on the books a year ago.
Granted, Apple made the tactical decision to issue nearly $17 billion in new (and cheap) long- term debt over the past 12 months to finance dividend payouts. That move was to avoid
having to repatriate foreign earnings that would then be taxed.
But even if Apple had used cash on hand to cover the dividend payouts, it still wouldn’t have made any real dent in the cash. And the continuing growth in cash exposes the Beats deal as
an insignificant balance sheet event. While Beats is the single largest acquisition for Apple, the $2.6 billion cash being paid (another $400 million of Apple stock is going to Beats investors) is just 5% or so of free cash generated over the past year. Even if Apple’s share price settles in after its big run of late, the cash “problem” suggests shareholder returns will be
high well past next year. Unleash some Financial Advisor Tools to learn more.
