AAPL: Gauge Analysis (updated February 26, 2021)

I have analyzed Apple's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

Apple became one of the world's most valuable companies by designing and selling stylish, easy-to-use computers, tablets, smartphones, music players, and watches, as well as software and media.  Services for these devices are also a lucrative and growing business for Apple, but selling iPhones is, by far, the company's largest single revenue source. The transition to 5G mobile technology may serve to boost iPhone sales even higher.  Apple is now selling laptops with fast, power-efficient processors it designed, replacing chips made by Intel, and they expectation is that other Apple-designed chips will be included in future products.  Apple's shares split 4-for-1 on 28 August 2020; they had split 7-for-1 just six years earlier.

Apple recorded profits of $64 billion, $3.74 per share, on revenue of $294 billion during the last 12 months.  In the quarter that ended on December 26, 2020, Apple earned $1.68 per share on a GAAP basis.  See Apple's most recent quarterly report and my review of their results relative to expectations for additional information.

Shares of Apple now trade for about $121 each, giving the company a market value of $2.1 trillion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Analysis Results:

Apple's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $2.1 trillion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.2 (>2.0 is conservative)

    Long-term debt/Working Capital = 460% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = N/A (negligible)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 13% (good)

    Owner Earnings growth rate (five-year average) = 19% (good)

    Free Cash Flow growth rate (trailing year) = 25% (very good)

    Free Cash Flow growth rate (five-year average) = 11% (good)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 47% (excellent)

    Operating Profit/Sales = 25.2% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 10% (fair)

    Dividend = 17% of last year's FCF (easily sustainable with room to grow)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 31.3 (very expensive)

    Price/GAAP Earnings (five-year average) = 42.0 (expensive)

    Free Cash Flow/Market Value = 3.9% (low, less than the five-year average of 6.6%)

    Acquirer's Multiple = 28.4 (very expensive)

    Price/Book Value = 31.3 (more expensive than the five-year average of 10.6)

    Price/Sales = 7.1 (more expensive than the five-year average of 3.9)

In summary, the analysis assigned Apple five GREEN, zero YELLOW, and two RED grades.  The resulting Overall Score is 48 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, Apple does not satisfy the GCFR criteria for investment consideration at this time.

The share price would theoretically have to fall by 47.9 percent, from $121.26 to $63.20, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that Apple's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on Apple's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #apple    #aapl    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

AAPL: Earnings Report for the Quarter Ending December 26, 2020

Apple reported after the market closed on January 27, 2021 it earned $1.68 per diluted share in the quarter that ended on December 26, 2020, up 34 percent from earnings of $1.25 in the equivalent 13 weeks of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

This post compares the quarterly Income Statement published by Apple to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Apple's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  Apple became one of the world's most valuable companies by designing and selling stylish, easy-to-use computers, tablets, smartphones, music players, and watches, as well as software and media.  Services for these devices are also a lucrative and growing business for Apple, but selling iPhones is, by far, the company's largest single revenue source. The transition to 5G mobile technology may serve to boost iPhone sales even higher.  Apple is now selling laptops with fast, power-efficient processors it designed, replacing chips made by Intel, and they expectation is that other Apple-designed chips will be included in future products.  Apple's shares split 4-for-1 on 28 August 2020; they had split 7-for-1 just six years earlier.

The following table is a simplified version of Apple's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided for comparative purposes.

Revenue in the December 2020 quarter totaled $111.4 billion, 21 percent more than last year's $91.8 billion. The iPhone business was responsible for 59 percent of overall revenue, and this unit's revenue grew by 17.2 percent compared to the year-earlier result. The Services business contributed 14 percent of revenue, and this unit's revenue increased by 24.0 percent. The Mac unit supplied 8 percent of revenue, and this business's revenue rose by 21.2 percent.

I was expecting Apple to report revenue of $97.1 billion for the December 2020 quarter.  The actual amount surpassed my estimate by $14.3 billion (14.8 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $67.1 billion in the latest quarter, which translates into a Gross Margin of 39.8 percent of revenue. Since it was higher than the 38.4 percent Gross Margin achieved in the year-earlier quarter, it signifies that Apple sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 38.2 percent in the December 2020 quarter, and Apple exceeded that prediction by 1.6 percent.

Apple spent $5.2 billion on Research and Development in the latest quarter, up from $4.5 billion one year ago. I had estimated that R&D expenses would be $5.1 billion.  R&D was 4.6 percent of Revenue.

Sales, General, and Administrative expenses totaled $5.6 billion in the December 2020 quarter, up from $5.2 billion one year ago.  SG&A expenses decreased from 5.7 percent to 5.1 percent of quarterly revenue, which shows Apple spent less per dollar of sales on indirect operational costs, such as marketing.  I had estimated that SG&A expenses would be 5.8 percent of revenue, and Apple spent less than that percentage.

Apple's Operating Income was $33.5 billion in the quarter, up 31.2 percent from the year-earlier period.  Operating Income exceeded my $26.3 billion estimate by $7.2 billion.

Interest and other non-operating items summed to a net  income of $45 million.  My estimate was $50.0 million.

The effective income tax rate rose by 0.2 percent to 14.4 percent, which had a negative effect on net income.  I expected the tax rate to be 16.0 percent.

Net income in the quarter attributable to Apple was $28.8 billion, $1.68 per share.  The figures for the year-earlier quarter were $22.2 billion, $1.25/share. My earnings estimate for Apple in this quarter was $22.2 billion ($1.30/share).

In summary, Apple earned in the December 2020 quarter much more than I had expected. The company had better than predicted Revenue growth, Gross Margin, Operating Income growth, and Income tax rate. 

 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #apple    #aapl    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

AAPL: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Apple's earnings for fiscal 2021's first quarter, which ended on December 26, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on January 28, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Apple.

Apple became one of the world's most valuable companies by designing and selling stylish, easy-to-use computers, tablets, smartphones, music players, and watches, as well as software and media.  Services for these devices are also a lucrative and growing business for Apple, but selling iPhones is, by far, the company's largest single revenue source. The transition to 5G mobile technology may serve to boost iPhone sales even higher.  Apple is now selling laptops with fast, power-efficient processors it designed, replacing chips made by Intel, and they expectation is that other Apple-designed chips will be included in future products.  Apple's shares split 4-for-1 on 28 August 2020; they had split 7-for-1 just six years earlier.

Shares of Apple now trade for about $130 each.  These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Apple recorded profits of $57 billion on revenue of $275 billion during the last year.  In the quarter that ended on September 26, 2020, Apple earned $0.73 per share, which beat the $0.71 Wall Street consensus forecast. See https://tinyurl.com/yx9xv84k for Apple's most recent quarterly report.

Revenue in the September 2020 quarter totaled $64.7 billion, 1% more than last year's $64.0 billion. The iPhone business was responsible for 41% of overall revenue, and this unit's revenue fell by 20.7% compared to the year-earlier result. The Services business contributed 22% of revenue, and this unit's revenue grew by 16.3%. The Mac unit supplied 14% of revenue, and the amount grew by 29.2%.  

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Apple communicated its expectations for the December 2020 quarter last October during the conference call it held for financial analysts after it released the results for the September quarter. (It would have been nice if they had included the guidance in their earnings press release or the associated 8-K SEC filing.) Apple declined to provide specific revenue guidance because of the uncertainties associated with COVID-19, but they did provide some information about the company's outlook.

Given the continued uncertainty around the world in the near term, we will not be issuing revenue guidance for the coming quarter. However, we are providing some insights on our expectations for the December quarter for our product categories. These directional comments, assume that COVID related impacts to our business in November and December are similar to what we’re seeing in October.

We just started shipping iPhone 12 and 12 Pro, and we’re off to a great start. We are also excited to start preorders on iPhone 12 Mini and 12 Pro Max next Friday. Given the tremendously positive response, we expect iPhone revenue to grow during the December quarter, despite shipping iPhone 12 and 12 Pro four weeks into the quarter, and iPhone 12 Mini and 12 Pro Max seven weeks into the quarter. We expect all other products in aggregate to grow double digits, and we also expect services to continue to grow double digits.

For gross margin, we expect it to be similar to our most recent quarters, despite the costs associated with the launch of several new products. For OpEx, we expect to be between $10.7 billion and $10.8 billion. We expect OI&E to be around $50 million, and the tax rate to be around 16%.

In the quarter that ended in December 2019, Apple's sales totaled $91.8 billion (see below), with the iPhone responsible for $56 billion or almost 61 percent.  Lacking more specific guidance, I've assumed iPhone sales in the December 2020 quarter will increase 3 percent, and sales of all other products and services will rise 10 percent.  These assumptions yield a revenue estimate of $97.1 billion

1) Net sales by category:
iPhone	$	55,957			$	51,982
Mac	7,160				7,416
iPad	5,977				6,729
Wearables, Home and Accessories	10,010				7,308
Services	12,715				10,875
Total net sales	$	91,819

I'm also assuming the Gross Margin will be 38.2 percent, which is about what it has been recently.  The other lines of the Income Statement get determined fairly easily from Apple's guidance and/or historical results.

This process yields an earnings estimate of $22.2 billion ($1.30 per share).

The following Income Statement summarizes the figures discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #apple  #aapl  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

Apple: Gauge Analysis for Value Investors (updated 31 October 2020)

I have analyzed Apple's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis evaluates investment suitability by determining whether the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all criteria into account, is also computed.  While the analysis includes both growth and value criteria, the calculation is weighted to favor companies that exhibit good value characteristics over companies that are fast growers.

An Overall Score of 60 or higher is good result, and it signifies that the subject company appears to have enough value-investment appeal to be worth examining in more detail.

First, a quick review of the company itself.

Apple has become one of the largest companies in the wolrld by selling stylish computers, tablets, smartphones, music players, and watches, as well as software and media.  Services for these devices are also a lucrative and growing business for Apple, but selling iPhones is, by far, the company's largest single revenue source. Apple's shares split 4-for-1 on 28 August 2020; they had split 7-for-1 just six years earlier.

Apple recorded profits of $57 billion on revenue of $275 billion during the last year. In the quarter that ended on 26 September 2020, Apple earned $0.73 per share, which beat the $0.71 Wall Street consensus forecast. See tinyurl.com/yx9xv84k for Apple's most recent quarterly report.

Shares of Apple now trade for about $109 each.  These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Analysis Results:

Apple's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $1.9 trillion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.4 (>2.0 is conservative)

    Long-term debt/Working Capital = 257% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = 1% (negligible)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = 8% (modest)

    Owner Earnings growth rate (five-year average) = 5% (modest)

    Free Cash Flow growth rate (trailing year) = 25% (very good)

    Free Cash Flow growth rate (five-year average) = 8% (modest)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 43% (excellent)

    Operating Profit/Sales = 24.1% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 10% (good)

    Dividend = 19% of last year's FCF (easily sustainable with room to grow)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 30.9 (very expensive)

    Price/GAAP Earnings (five-year average) = 40.1 (expensive)

    Free Cash Flow/Market Value = 3.9% (low, less than the five-year average of 7.0%)

    Acquirer's Multiple = 28.7 (very expensive)

    Price/Book Value = 28.8 (more expensive than the five-year average of 9.2)

    Price/Sales = 6.8 (more expensive than the five-year average of 3.7)

In summary, the analysis assigned Apple four GREEN, one YELLOW, and two RED grades.  The resulting Overall Score is 44 of the 100 possible points, which is unappealing.  The score is below the 60-point threshold, and, therefore, Apple does not qualify at this time for consideration by value investors.

Check back here occasionally for updates to the Overall Score, which will typically move up or down each time the company releases new financial results and when the share price changes significantly. 

This analysis reported here is not, by any means, a complete evaluation of the subject company, and it does not consider all material facts about the company's operations, finances, or future prospects. The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate. Readers are encouraged to independently verify all data. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk. The analysis is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a position in the subject company and/or its competitors. The methodology and results are subject to change without notification.

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 #apple    #aapl    #valueinvesting    #nac_financialanalysis