Wednesday, October 19, 2011

Apple Reports 4th Quarter Earnings

From Apple's (AAPL) latest quarterly earnings press release:
  • Revenue: $ 28.27 billion vs $ 20.34 billion in the year-ago quarter
  • Net Profit: $ 6.62 billion ($ 7.05/share) vs $ 4.31 billion ($ 4.64/share) in the year-ago quarter
  • Cash and Investments: $ 81.6 billion ($ 86.8/share) vs $ 51.01 billion a year ago
  • No Debt
For the full year, Apple earned $ 25.92 billion ($ 27.68/share) compared to $ 14.01 billion ($ 15.15/share) the prior year. The stock is down to ~$ 400/share this morning as I write this.

Subtract net cash and investments per share of ~$ 87/share from that share price and you have an enterprise value per share of $ 313.

So enterprise value/earnings is $ 313/$ 27.68 or a 11.3x multiple.

Not exactly pricey. When a high flying stock selling at a high multiple of earnings misses expectations it makes some sense for it to drop substantially. That's because so much of that price was based on hope and speculation. Hopes dashed...so look out below.

Apple has no such speculative cliff to fall off.

Back to fundamentals. According to Apple's CFO Peter Oppenheimer, they expect substantially higher earnings next quarter.

Oppenheimer said the following in the press release: "Looking ahead to the first fiscal quarter of 2012, which will span 14 weeks rather than 13, we expect revenue of about $37 billion and we expect diluted earnings per share of about $9.30."

$ 9.30 per share is equal to $ 8.7 billion of earnings.

In one quarter.

It's hard to believe a company that size is capable of still profitably growing that fast with modest need for capital. Growth for its own sake is overrated but this is of the high return variety.

Somehow this all qualifies as a disappointment.

As a result the stock is down.

Good.

Reuters: Apples Shares Fall After Rare Earnings Miss

I've seen quite a few headlines like the above.

Back to expectations. Naturally, a business that does not meet expectations will often move a stock in the short run. The voting machine at work.

Yet, this expectations game obviously has no effect on value or long run returns for investors.

In the end returns come mostly down to how the business performs over time and whether shares be acquired at a reasonable discount to value.

A durable stream of earnings bought at a discount that provides sufficient margin of safety against the unknown and unknowable.

Greater uncertainty = more margin of safety required.

Apple's return on capital and profitable growth is exceptional. At least for now. Unfortunately, it's always tough to judge the durability of any technology business.

Are their economics sustainable? They look sound for now but we shall see.

This judgment is always much easier with something like Coca-Cola (KO) or Procter & Gamble (PG) yet I don't see either of them putting up numbers like Apple anytime soon.

Apple's stock may or may not go down substantially. That's of no concern to me. The price is fair enough. They're on a roll without a doubt. What does concern me is the changes to Apple's highly competitive landscape and how the dynamics of the industry could eventually hurt its core economics.

Not an easy thing to judge.

I'll use my energy trying to understand that but most assuredly will not worry about quarterly results measured to the penny or even pennies per share.

Adam

Established position in Apple at a substantially lower price
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