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Momentum

Apple Inc (AAPL)

When Apple hit the Zacks Rank 1 buy list, I couldn’t wait for the opportunity (pullback) to bring it to all you momentum readers.

While you may think you know everything about Apple, there are some nuances about the product cycle and the expectations for the company that make it unique.  It’s a company that everyone says is cheap, but it never seems to get too lofty in its valuation. 

In the past week alone the company was sued by Samsung,  got a new price target of $710 by Barclays Capital and announced the release of their newer, faster and higher definition 4G iPad.  By the way, you can reserve a new iPad today starting at $499, for delivery on March 16th.

In the bullpen is the new iPhone (5?) which will most likely hit stores later in the year.  Expectations are high for the new product to blow consumers away after the 4s just seemed to slightly improve on the previous model.  Even though the 4s may not have met expectations completely, it broke sales records for Apple.  

With all the excitement, drama and still relatively low P/E multiple, is this cash generating behemoth still a buy? 

Company Description & Developments
Apple is the world’s number one maker of Smartphone devices and produces an array of electronic devices including computers, personal media players and peripherals.   Since coming public on December 12, 1980, the company has since grown to have the largest company by market capitalization in the world.

The iTunes store, which houses music, video, applications and more reached 25 billion downloads, which is an impressive feat.

Apple’s key to success will be to keep their momentum going, which for the past 10 years has been truly remarkable.  With the passing of Apple’s patriarch, some Apple pundits (including me) are wondering if their innovation and focus will continue to impress customers and investors. 

The Recent iPhone 4s and iPad releases seemed a bit lackluster by Apple’s standards, but perhaps they are improving their products, keeping them at the same price while increasing the time between major form factor and feature changes to keep people buying.

Apple is good at producing quality products that continue to intrigue and excite consumers.  Peppered into their major product launches, Apple does an excellent job of refreshing their entire suite of products, like they did with Apple TV, which is now 1080p capable. 

Between Apple OS and Google’s Android, the two companies control roughly 80% of the world’s smart phone market and have the eyes and minds of millions on their software daily, which is a major market to capture. 

Financial Profile
Apple is a mega-cap (495 billion) company that is trading at about 12.34 times forward (expectations for next quarter) earnings.  AAPL became a Zacks Rank 1 strong buy on January 28th 2011.

Apple reported a quarterly sales increase of an astonishing 64% at their last earnings report and saw a 97% leap in EPS for the same period, which was fueled by the iPhone 4s release.  Annual sales were up 73% compared to (fiscal) FY2010 with total sales of roughly 108.2 billion in FY2011. 

The tech giant’s earnings increased from $15.15 in FY2010 to $27.68 in FY2011 and are expected to earn $42.96 in FY2012 according to the Zacks Consensus Estimate. 

Normally growth of this magnitude would evoke a higher P/E multiple, but Apple seems to trade at values more like a Blue Chip than a growth stock. 

Earnings Estimates
Apple tends to be rather conservative and vague in its forward projections, but expected revenue of about $32.5 billion and diluted earnings per share to come in at about $8.50, which were both higher than consensus estimates.

The last quarter which included the holidays and iPhone 4s release was record-breaking with sales of 37.04 million iPhones, which represented a 128 percent jump in units sold compared to the year-ago quarter. They also sold 15.43 million iPads during Q4,  a 111 percent unit increase over the year-ago quarter and saw a 26 percent unit increase over the year-ago quarter for the Mac. 

iPod sales were down 21% compared to Q42010.  

The company is also generating massive amounts of cash and managed to book over 17.5 billion in cash flow from operations in Q4 alone.  Some experts believe that cash may be returned at least partially to investors in the form of a special dividend.

Apple has a history of surprising analysts to the upside consistently. This is partially due to their lack of commentary and conservative outlooks. They did miss in Q32010 because the iPhone release came later than expected.  Over the past 4 reports, their upside surprise was an average of 22%.

Of the 40 analysts who cover AAPL, the consensus is for the company to grow earnings by 55% in the current year (FY2012) and roughly 11.5% in FY2013. 

In terms of the magnitude of analyst estimate trends, we are seeing all of the consensus estimates higher than they were 90 days ago for the current and next quarter as well as FY2012 and FY2013.  Many analysts have been adjusting their EPS targets higher over the past 30 days.

Market Performance & Technicals
When you look at Apple technically, it  has been bullish for quite a period of time.  The stock tends to consolidate for a couple months and then run up into major product launches and sell on the fact, which is what we are seeing with the iPad release.

This most recent rally has propelled the stock into all time high territory and left the stock with just minor support levels until you get down to the $430 level.

The stock has managed to track its 50 day moving average for the past 18 months and has maintained above its 200 day moving average in that same timeframe.  The problem is that the 50 day average is $464 and the 200 day at $397, both a ways away from the current stock price. 

AAPL has exceeded the S&P 500’s performance in the past year by almost 47% and outpaced it by over 24% in the past 3 months during its recent rally.  The stock remains in a bullish trend and has maintained its momentum in the past month, leading the index by about 14%.    

The recent pullback may provide a good entry for this raging bull.  As long as the broad market maintains its trend, Apple should follow suit.  For the longer term investor, you have to feel darn comfortable with the company’s valuations. 

Jared A Levy is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Whisper Trader Service.

 

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