Sorry if someone posted this already:
Apple Still a Bargain?
The Motley Fool - January 14, 1999 12:46
January 14,
1999/FOOLWIRE/ -- Shares of Apple Computer (Nasdaq: AAPL) fell $2 5/8 to $43
7/8 this morning following a better-than-expected Q1 earnings report.
Excluding a one-time gain, earnings of $0.78 per share topped the consensus
$0.70 estimate. Earnings in the seasonally strong September quarter had been
$0.68 per share, so the company delivered a sequential gain as well as a
crushing 136% advance over the year-ago period, when Apple rode the rollout
of its G3 desktops to its first real turnaround quarter.
While today's selloff no doubt includes simple profit-taking, some analysts
issued lukewarm reports. Salomon downgraded the shares based partly on fears
that Apple had stuffed the retail channel to get to its unbelievable $25
million (two days) worth of inventory, down from $400 million a year ago and
$78 million in the September quarter. PaineWebber complained that iMac
sales, while strong at 519,000 units out of a total of 944,000 total units
sold, were below the firm's aggressive target.
A larger concern is that Apple has picked the low-hanging fruit of Mac
faithful looking for upgrades and that its long-term growth prospects are
still sketchy. PaineWebber estimates that of 27 million total industry
computer units shipped in the December quarter, Apple's share remains below
4%, or far from its 7%-8% share of the total installed base. Then there's
valuation. Apple is currently benefiting from U.S. net operating loss
carryforwards that should keep the tax rate at about 10% this year before
returning to the mid 30% range next year. So the stock already sells at 22
to 24 times fully taxed earnings estimates for FY99.
CFO Fred Anderson did say that two days inventory was as good as it gets and
that Apple's target is 4 to 6 days. Part of the massive inventory
improvements, though, have come from systematic changes, including Apple's
streamlined product strategy, its outsourcing of board production, and
improvements in its supply chain, which should only get better given that
the company installed an SAP enterprise system during the quarter that
should help sales at the online store. The Internet store actually closed
midway through December to complete that installation. Anderson said channel
inventory was flat at 5 weeks and that all of the old iMacs still in the
channel are price-protected (so without the price cut, gross margins would
have been even higher). With channel stuffing, you usually see days sales
outstanding rise, whereas they fell sequentially from 56 to 49. With 51 days
sales payable, Apple operated this in Q1 with a negative cash conversion
cycle a la Dell (Nasdaq: DELL).
While reported revenue grew just 8% to $1.7 billion, Apple ditched its
monitor and printer business in the past year. Revenue from computer systems
actually increased 17%, quite a feat considering the drop in the average
unit price from $2,400 last year to $1,840 in September to the current
$1,776. Even backing out a 150 basis point one-time gain in gross margins
from operating system software upgrades, gross margins were 26.7%, steady
sequentially and up from 22.4% last year. As for the iMac, what's compelling
to me is that some 32% of sales went to first-time computer buyers while 13%
went to former Wintel customers. The iMac is expanding Apple's market --
massively. And both consumer portables and the important OS X operating
system upgrade will be introduced later this year.
When valuing Apple, investors should work in a 36% tax rate. But they must
also back out the $9.44 cash per share net of debt. If you assume about
$2.00 per share in FY99 earnings, Apple's cash-adjusted price is now 17
times the forward estimate, in line with its revenue growth. No doubt, Apple
faces continued challenges. Still, a long-term investor might see a company
with a consumer-oriented brand and proprietary technology, a company that's
regaining market share and delivering operational efficiencies that are tops
in its industry. Such a company ought to trade at a premium both to the
market and to its own growth rate. (A recording of Apple's conference call
is available at 402-220-4030 through 6 p.m. Pacific Time today.)
-- by Louis Corrigan |
