The following is from the Motley Fool, it starts off sounding bullish
and ends up neutral. Sounds as if he hasn't followed AAPL too closely
when he says, "Apple will begin selling it's products from it's web
site in October."
Another thing, I keep reading that Apple is only selling to it's
"installed base", but have never seen any hard data to substantiate
the claim. Is this just an assumption on the part of the writers?
fool.com
FOOL ON THE HILL
An Investment Opinion
by Alex Schay
How Do You Like Them Apples?
Shares of Apple Computer (Nasdaq: AAPL) gained $1 1/16 to $39 today,
busting through their 52-week high and reaching levels the company has
not seen since takeover rumors drove shares this high in late 1994-
early 1995. This summer, though, the move looks more substantial, as
the company has executed on its strategic goals for the first time in
a long time.
The news out yesterday was that the company has seen strong orders for
its new $1,299 iMac, a rich entry-level consumer machine that the
company introduced at MacWorld in July. To date, the company has taken
orders for 150,000 iMacs, which indicates that its sell-in of the
machine could account for a substantial part of the $286 million in
marginal revenue estimated by analysts for the fourth fiscal quarter.
A continued strong sell-in of the iMac and a ramp up of the G3
PowerBook make the fully taxed EPS estimate of $0.48 for the quarter
look entirely within the range of possibility.
Is this about the power of the Apple brand? What is the value here?
First, the power of brands is not magic, after all. If it were, Apple
wouldn't have served up zero shareholder value over the last decade.
Branding is about pricing power and about walking across the street to
get a certain product if a store doesn't offer the brand you like, and
most importantly, branding is about building a sustainable business
franchise from which a management can generate returns on capital
above and beyond the cost of capital invested in the business.
A brand can lose its currency, though. Market share can slip away, but
it can also be regained. That's because mindshare is a different
concept than market share. McDonald's (NYSE: MCD) had lost some market
share, but it has regained its position because of its mindshare --
that brand equity that brings people to think "McDonald's" when they
think of a quick-serve restaurant. Apple still possesses mindshare
because of the tremendous brand equity that was built up and not
completely destroyed by years of bumbling.
With a good deal of the Apple installed base made up of Macs that are
over five years old, part of this order flow may be coming from those
who were afraid of moving to a PC and are now finally coming out of
the woodwork and ordering a Mac with more than 100 megabytes of
storage and 4 megabytes of DRAM. Kids certainly don't have a
horrendously tough time figuring out how to run a PC, and judging by
the entry-level sales of $1,000 Wintel boxes, the rest of the world
isn't exactly hankering for an "easy-to-use" personal computer. The
marketing spin on Apple products, then, is actually kind of
patronizing. "Think[ing] smart" entails buying the computer that meets
your intersection of price and utility, which is otherwise known as
"value." Apples aren't so much more easy to operate than Wintel
machines that they justify their price. In other words, Wintel
machines have offered a more compelling value proposition for years.
Until now?
It's not as if no one is writing software for the Mac operating
system. The largest outside vendor of Apple software is Microsoft
(Nasdaq: MSFT), though cynics believe Microsoft made an investment in
the company last year to keep it alive to avoid antitrust scrutiny
(shades of John D. Rockefeller's dummy competitors). That's a little
"Oliver Stone" to believe, though. There still is a portion of the
population that believes the Mac does prevent a good value
alternative. Take that and add it to the fact that Apple does own
mindshare that is likely much larger than its actual market share, and
one would have been hard-pressed to be short Apple going into this
week.
Coming into the week, the company was priced at less than two times
enterprise value to all financial capital and just over five times
enterprise value to invested capital. That's within the context of the
company achieving return on invested capital (annualized) of 17.7% and
ROE of 21% last quarter (using fully taxed earnings figures). At 17
times estimated 1999 EPS of $1.98, the multiple to forward numbers
didn't look out of whack, either.
Even counting the run-up from last Friday's close, the company isn't
trading at a huge multiple to financial capital or invested capital,
either:
AAPL CPQ DELL GTW MUEI
EV/Fin. Capital..2.16...3.90....33.37...5.82...2.31
EV/Inv. Capital..5.93...3.90..-367.18..13.86..10.83
On the basis of multiple to the 1999 mean earnings estimate, the pure-
play or near pure-play PC companies look like this:
AAPL...19.7
CPQ...19.7
DELL...41.2
GTW...19.7
MUEI...22.0
The market is a discounting organism, though. In the short-run,
touchy-feely stuff and expectations can price a company, but
eventually it comes down to financial performance. Last quarter,
earnings and capital efficiency were very good at Apple, while the
company ended the quarter with less than two weeks in inventory. By
outsourcing various assembly functions and going to built-to-order
with its re-sellers, the company probably will speed up its asset
turnover. However, its days sales outstanding figure looks
suspiciously like an old-line PC company that has massive sell-ins
with generous price protection for its retail and distribution
partners. In terms of its cash conversion cycle, Apple's numbers at
the end of last quarter didn't look all that hot:
Days in Inventory...11.30
Days in Payables...50.18
Days Sales Outstanding...59.55
Cash Conversion Cycle...20.67
Margins and cash flow can look great when you've got something new to
offer and new products are being sold into the channel, but it's a
hard act to follow. Dell Computer (Nasdaq: DELL) doesn't outperform
just because it does a great job at what it's supposed to do, but
because it doesn't suffer price erosion on goods sitting on shelves
and because it's able to take advantage of falling component prices.
It is also able to compensate the best in the business with the most
competitive packages without diluting shareholders, as its negative
cash conversion cycle allows it to neutralize employee option
dilution. It's not the magic of brands -- it's very basic performance.
This doesn't mean Apple can't get there. It will sell its products
directly from its website starting in October, which makes its re-
sellers grumble, but, hey, life is a contact sport. That should kill
off some receivables and help inventory flow even more. The market,
then, isn't discounting fuzzy brand concepts in here. It's discounting
raw performance. Without getting into the consubstantiation vs.
transubstantiation fight over operating systems, that's what the
advance in Apple's share price is all about. Can it keep it up? If it
follows up on the early sell-in, keeps up its return on invested
capital performance, and is able to avoid the messes of the past that
came from ineffective reinvestment of cash flow, yeah, why not? If the
company can do those things, it's really not that expensive.
Finally, can one trust a guy like Steve Jobs, who sold all of the
shares of Apple (except one) that he received in exchange for selling
NeXT? Can he be an effective steward of the company? With Rhapsody and
the Newton OS dead (the income statement looks like a featherweight
without all that bothersome research & development), reinvestment in
the business has lightened up considerably, and with cash on the
balance sheet and the company currently generating excess cash, this
will be an interesting area to watch. But that has been the
traditional Achilles heel for Apple. It's on that issue and the
company's return on capital performance that future value creation
will hinge. |
