Special Feature
Where to next for Apple Shareholders? One of the most anticipated moments of the current earnings’ season occurred on the 23rd April after the close of the US equity market. The behemoth that is Apple unveiled its Q2 earnings... After rising from a pre-iPhone level of $120 all the way through to a record high, seen last year, of a smidge over $705, Apple shares have since been in a seemingly interminable dive this last eight months, plumbing a low of $385 in recent days.
The capital distribution ramp-up is the company effectively admitting that they are unable to deploy their large cash reserves in a manner that would generate higher rates of returns than the company itself will at the current equity valuation.
Investors have become seriously worried, it seems, with the increasing competition the company is facing, in particular from Samsung, together with the absence of new and innovative products coming from the company’s pipeline.
The buyback of stock commitment was increased by a whopping $50bn, such that by 2015 they expect to have purchased back almost $6bn of their own stock. With a market cap of $377bn that is almost 20% of their own stock that they expect to buy back. Point number one for bulls of the stock: that magnitude of stock purchasing, together with a rising book value (a virtuous rise could actually occur as the Treasury stock of their own shares will increase the book value if the stock rises) as the cash pile continues to rise, is likely to act as a brake on any material slide further in the stock price. This is setting up a good risk:reward trade for bulls.
Margin pressures continue
The post results conference call did however offer some hope to bulls in revealing a substantial ramping up of the company’s capital distribution plans — something the likes of David Einhorn and other investors have been calling for from Tim Cook for some time.
38 | www.financial-spread-betting.com | May 2013
The negative from the results, even though Apple modestly beat earnings expectations with a $10.09c EPS figure delivery on revenue of $43.60 billion, was that they also revealed, although widely expected, the first profit decline in more than a decade. With no new products in the company’s immediate pipelines, and during the last quarter no new device upgrades, it is not surprising that sales comparables slowed. This was all too evident in terms of gross margins with a huge decline from an enviable 47.4% in Q2 2012 to the current 37.5% in Q2 2013. According to Peter Oppenheimer, the company’s CFO, the slide in gross margins will continue over the next quarter which he has attributed to the “new product mix”.