What’s Cooking at Apple?

“The share price is factoring in little or no growth. We suspect that this is just temporary, we are certainly not alone in making this assumption, that does not mean you are right of course. We remain buyers and confident that growth will return, perhaps only later in the year, by that time the share price would have adjusted.”


To market to market to buy a fat pig Our market closed Tuesday (that seems very long ago) slightly in the green, up 0.15%. On the US front we had their markets also slightly up over the last two days, with the big news being that the FED is doing nothing. No surprise there, inflation numbers are not high enough yet to risk raising rates now and potentially having to drop them again because the spectre of deflation shows its scary head.

The “Bond King”, Bill Gross only sees one rate hike for this year, coming into the year the consensus among people in financial markets was for 4 rate hikes this year. As we have written many times before, we do not make investment decisions based on what the FED/ SARB are doing or are expected to do. If you didn’t get into the market last year because the FED’s imminent rate hike was going to cause the market to fall, what do you do now? The FED only raised rates by 25 basis points and with potentially only one or two more hikes this year. Do you stay out of the market for another 2 years until interest rates are back to “normal”? Focus on the companies that you are buying, what the FED do today will long be forgotten in 10 years time but the companies you own will still be selling their product/ service.


Company corner

There are many times when you buy a particular stock and then question why you own that particular stock. In fact, it happens all of the time, when you get your weekly, monthly or annual statements, it is after all supposed to be part of the process, making sure that the thesis is still firmly intact. Making sure that the specific investments that you own still fit the profile, still match all the criteria that you are looking for as an investor. It is Warren Buffett’s friend and right hand man who always says that it isn’t supposed to be easy. What he (Charlie Munger) means by that is stock investing of course is harder than most people think, it is only the longer you do it that you realise that. Unlike large amounts of push ups and bunker shots for South Africa’s most decorated golfer. True story, say what you want about Gary Player (80 years old), at 9 majors, he is more than double that of the next South African.

Perhaps that is the perfect analogy for Apple inc., comparing them to a fit, even if older Gary Player, at this current point in their product cycle. The company has delivered the most incredible electronic products known to mankind, they really do make the most beautiful devices, having started over a decade ago, changing the company from the original PC maker to recognising how music needed to be spread in the digital era. They certainly did not invent the smartphone, they did however almost perfect it, the latest version of the phone, the 6S is truly an amazing human achievement. Although there is a big difference here, I think often commentators and the casual observer (with a large platform of hungry spoon fed mobs) compare too easily companies and countries to that matter, to living beings. GE has been around for over a century, and no doubt will be around for another century.

Apple is a little over 40 years old, the old founder, one of them has departed the earth, the other is a bearded man who had an accelerating Prius (no laughing matter) once upon a time. Tim Cook, the man who runs the business has legendary work ethic. The product and design team, led by (Sir) Jony Ive churn out beautiful products. So I don’t think that is the problem either, the management or the products, they are great. Don’t worry about the resources, at the close of the bell when Apple released their numbers for the quarter just passed two evenings back, they had 233 billion Dollars of Cash and Cash equivalents. That is around 43.3 percent of their closing market capitalisation last evening. They do have 64.4 billion Dollars worth of debt, aiming to get that to rise to as much at 87 billion Dollars, we will get to that in a bit. That is still an astonishing 31.3 percent of net cash in the market capitalisation, for every 100 cents of Apple share price that you own, 31 odd cents is cash, the other 69 cents is the rest of the business.

So why is the market beating up on the stock? The stock has been down over 6 percent last evening to close at 98 Dollars a share, the historical multiple now sits at under 11 times earnings. Plus the quarterly dividend has been boosted to 57 cents, that puts the current yield at 2.3 percent, after 15 percent dividend tax that equals just short of 2 percent. Hardly a kings ransom, but very acceptable in light of the fact that rates are set to gradually rise in a longer dated trajectory that most think. The ten year treasury for comparisons sake (US Treasury) yields 1.85 percent. Meh … Earnings were a meet, sales showed the first quarterly comparable decline in 51 quarters, that is a very long time and showed how a consumer electronics stock was resilient through the greatest financial crisis in living memory.

It wasn’t the numbers today that disappointed, it was the guidance for the next quarter that missed the mark. And as Paul then retweeted, the stock is trading on the same metrics as a Chinese steel mill. I suspect that trading on very low valuations is a function of the present term investor questioning whether or not they should be buying a company that has their flagship product not growing, even if it is presently. Some of the material that I have read suggest that many discount the only real growth business (presently), the services business, which generated 5.991 billion of the 50.557 billion in revenue. Gene Munster, who has been positive on Apple for some time now (he has presently some scrambled egg on his face), suggested that business standalone could be worth as much as 200 billion Dollars. Revenues of 25 odd billion, growing at 20 percent means that Gene possibly has the stock closer to a Google type metric of 30 times earnings to get to that valuation.

So, we have been pretty philosophical about the earnings, which not only show that the company will possibly sell fewer iPhones this year than at any other stage in that product cycle (we still have the next phone cycle to look forward to), the usual comments about next big product launch gets asked all the time. The car, the TV, virtual reality (where are those people who laughed at the Zuck when he bought Oculus?), I am sure that the company will deliver products that meet the expectations of the fans. There are many territories where they can sell a sharply higher number of products into. The flagship product is just going through a levelling off, somewhat. The share price is factoring in little or no growth. We suspect that this is just temporary, we are certainly not alone in making this assumption, that does not mean you are right of course. We remain buyers and confident that growth will return, perhaps only later in the year, by that time the share price would have adjusted. We certainly think that this is a big opportunity and still rate the stock a strong buy.


As we spoke about it on Tuesday, Conforama (Steinhoff) was involved in a bidding war for Darty with Fnac. The problem with a bidding war is that someone normally ends up over paying, Steinhoff came out this morning saying that they are not upping their bid. Great to see and not surprising from management. You don’t get to the size that Steinhoff is by being lax with capital allocation. Here is the statement from the company.

“Our independent board and management had a clear valuation in mind for the standalone Darty business. Our final offer of 160 pence for each Darty share reflects the evaluation criteria we use for all acquisitions, including return on investment and value creation. We remain of the opinion that, at this price, the Darty business would have been a good addition to the Steinhoff group of businesses but, at an increased price, it would no longer create sufficient value for Steinhoff shareholders, employees and other stakeholders.”



Linkfest, lap it up

Elon Musk’s vision of going to Mars is one step closer – SpaceX plans to head for Mars as soon as 2018

Sticking with Elon Musk and his companies – Tesla’s Autopilot lowers probability of having an accident by 50% based on early data, says Musk. If all the cars on the road are controlled by computers we should see death tolls drop to near zero, an aspect not always considered when talking driverless cars.


Home again, home again, jiggety-jog. Last night Facebook crushed analyst estimates, their net profit number is almost 3 times what it was a year ago with 1.6 billion users. The stock is up 10% in pre-market trading, more detail tomorrow. Tonight we get numbers from Amazon and Amgen both very exciting companies. If you haven’t checked the oil price recently it is now at $47 a barrel, not great if you are a consumer. Big data out today is US GDP, they are expected to have grown by 0.7% QoQ.

Sent to you by Sasha and Michael on behalf of team Vestact.

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