AAPL - Apple Inc.

[Viking]

When ranking luxury brands amongst China's wealthy, Apple is right near the top once again. Importantly, Apple held the number two spot with men and improved to the number three spot with women. Looks like Apple's brand is a strong as ever in China.

 

The article linked below talks about a slowdown in gift giving this year. This is not ideal for Apple but clearly the more important factor is how the brand is perceived. Future sales should be good.

 

Best brand for gifting: by men #2 and by women #3

 

http://on.rt.com/0b8qm4

[Liberty]

Thanks for posting, Viking.

 

This is even better when you think that until recently, the majority of the population who was on China Mobile didn't officially have access to the iPhone, and even a lot of those who did get it (on the grey market or on another carrier) were stuck on antiquated 2G/EDGE networks. iPhones are going to be much more desirable now that fast 4G networks are being rolled out on a larger scale.

[Guest valueInv]

When ranking luxury brands amongst China's wealthy, Apple is right near the top once again. Importantly, Apple held the number two spot with men and improved to the number three spot with women. Looks like Apple's brand is a strong as ever in China.

 

The article linked below talks about a slowdown in gift giving this year. This is not ideal for Apple but clearly the more important factor is how the brand is perceived. Future sales should be good.

 

Best brand for gifting: by men #2 and by women #3

 

http://on.rt.com/0b8qm4

 

The Chinese are not the only ones:

 

http://www.theguardian.com/technology/2014/jan/17/android-gravity-iphone

[treasurehunt]

Icahn said on Twitter that he bought 500m more in AAPL shares in the past two weeks, now owns over 3 billion. Keeps pressuring for larger buyback and will release another letter about it soon.

 

Icahn bought $500 million more in AAPL shares today, taking his total position to $3.6 billion. He also released an open letter to AAPL shareholders explaining his reasons for asking management to do a huge buyback: http://www.sec.gov/Archives/edgar/data/320193/000092846414000003/aaplpx14a6g012314.htm

 

It's a pretty good letter, I must say.

[DCG]

I wish Icahn would just go away.

[Viking]

When it comes to what it does with it's retained earnings, Apple is one of the most conservatively managed companies out there. Perhaps this is due to its near death experience and never wanting to be put in that position again.

 

Put simple, for years, earnings were simply deposited in their bank account. Their net cash position grew to close to $150 billion early last year. Clearly, this is a crazy big number, likely far in excess of what Apple needs to run their business. And they generate about $40 billion in net earnings each year, with their business prospects improving each year.

 

I think Icahn has performed a valuable service on behalf of all investors by bringing some valuable discussion to Apple's growing cash pile. My guess is it is having an impact at Apple.

 

I also think Apple has made some great decisions the past 18 months regarding return of capital. The dividend was started then increased by 15%, and likely will be increased another 10 to 15%. A small share repurchase program was started (to offset stock awards), which was then increased in size and then accelerated. Apple definitely is moving in the right direction. The crazy thing is even with all the dividend payments and share repurchases done the past year Apple's net cash position has barely budged.

 

During 2014, if Apple increases the dividend 15% and simply executes what is left in the current share repurchase program (about $1.5 billion per month) they will once again be growing their net cash position. This makes little sense to me. I agree with Icahn that Apple should be very aggressive in 2014 and, just like 2013, increase the share repurchase plan in a meaningful way. I'm not saying $50 billion is the number; I would be happy if they did what they did in 2013. Borrow another $18 billion and do an accelerated share repurchase and then use all domestic earnings to pay the dividend and repurchase additional shares. This would allow Apple to reduce the share count from 899 to below 860 million and pay an annual dividend = $14.00/share. This would also allow then to keep the net cash position in the $130 billion range, which is still crazy high but should still be large enough for Apple moving forward.

[cubsfan]

When it comes to what it does with it's retained earnings, Apple is one of the most conservatively managed companies out there. Perhaps this is due to its near death experience and never wanting to be put in that position again.

 

Put simple, for years, earnings were simply deposited in their bank account. Their net cash position grew to close to $150 billion early last year. Clearly, this is a crazy big number, likely far in excess of what Apple needs to run their business. And they generate about $40 billion in net earnings each year, with their business prospects improving each year.

 

I think Icahn has performed a valuable service on behalf of all investors by bringing some valuable discussion to Apple's growing cash pile. My guess is it is having an impact at Apple.

 

I also think Apple has made some great decisions the past 18 months regarding return of capital. The dividend was started then increased by 15%, and likely will be increased another 10 to 15%. A small share repurchase program was started (to offset stock awards), which was then increased in size and then accelerated. Apple definitely is moving in the right direction. The crazy thing is even with all the dividend payments and share repurchases done the past year Apple's net cash position has barely budged.

 

During 2014, if Apple increases the dividend 15% and simply executes what is left in the current share repurchase program (about $1.5 billion per month) they will once again be growing their net cash position. This makes little sense to me. I agree with Icahn that Apple should be very aggressive in 2014 and, just like 2013, increase the share repurchase plan in a meaningful way. I'm not saying $50 billion is the number; I would be happy if they did what they did in 2013. Borrow another $18 billion and do an accelerated share repurchase and then use all domestic earnings to pay the dividend and repurchase additional shares. This would allow Apple to reduce the share count from 899 to below 860 million and pay an annual dividend = $14.00/share. This would also allow then to keep the net cash position in the $130 billion range, which is still crazy high but should still be large enough for Apple moving forward.

 

I'm happy to see Icahn press on this issue - why does Apple need $140B?

 

They don't understand capital allocation.

[PJM]

When it comes to what it does with it's retained earnings, Apple is one of the most conservatively managed companies out there. Perhaps this is due to its near death experience and never wanting to be put in that position again.

 

Put simple, for years, earnings were simply deposited in their bank account. Their net cash position grew to close to $150 billion early last year. Clearly, this is a crazy big number, likely far in excess of what Apple needs to run their business. And they generate about $40 billion in net earnings each year, with their business prospects improving each year.

 

I think Icahn has performed a valuable service on behalf of all investors by bringing some valuable discussion to Apple's growing cash pile. My guess is it is having an impact at Apple.

 

I also think Apple has made some great decisions the past 18 months regarding return of capital. The dividend was started then increased by 15%, and likely will be increased another 10 to 15%. A small share repurchase program was started (to offset stock awards), which was then increased in size and then accelerated. Apple definitely is moving in the right direction. The crazy thing is even with all the dividend payments and share repurchases done the past year Apple's net cash position has barely budged.

 

During 2014, if Apple increases the dividend 15% and simply executes what is left in the current share repurchase program (about $1.5 billion per month) they will once again be growing their net cash position. This makes little sense to me. I agree with Icahn that Apple should be very aggressive in 2014 and, just like 2013, increase the share repurchase plan in a meaningful way. I'm not saying $50 billion is the number; I would be happy if they did what they did in 2013. Borrow another $18 billion and do an accelerated share repurchase and then use all domestic earnings to pay the dividend and repurchase additional shares. This would allow Apple to reduce the share count from 899 to below 860 million and pay an annual dividend = $14.00/share. This would also allow then to keep the net cash position in the $130 billion range, which is still crazy high but should still be large enough for Apple moving forward.

 

I'm happy to see Icahn press on this issue - why does Apple need $140B?

 

They don't understand capital allocation.

 

Even though i agree that APPL has not been the smartest company in terms of capital allocation, I do not see any impact on share prices even with an aggressive buyback. At current market price the shares are priced at 10x P/E (excluding cash of $130b). If Appl went ahead and did a share buy back of $50b at current price, it would reduce the outstanding shares to approx. 800m. Analyst expect 2014 earnings to be 40b (as per Ichan's letter) which would put forward EPS of 50 (after the buyback of $50b). If the market continued to price them at 10x PE (excluding remaining cash) that would bring the price to 500. Adding $80b of remaining cash would bring the price up to 600. So <10% increase in value (even lower after the interest impact of debt that needs to be raised for the buyback program).

 

IMO dividend increases (though i'd prefer share buy back for tax reasons) would help drive up the share prices as yield hungry investors would get in more aggressively.

 

In either case the market is pricing APPL based on the perception that margins will go down and they will not come up with any new game changing products. However that sentiment is independent of the cash that APPL holds and/or buyback program. IMO the shareholder value would go up a lot more in the long run if APPL used the cash for smart acquisitions or even buying holdings in other good companies. Maybe APPL can use an investor like WEB to manage its assets.

 

[Viking]

JPM, good points. When companies have lots of cash sitting on the balance sheet they normally find some way to waste it... Usually for overpaying for a large acquisition (or multiple).

 

Buying back a large amount of stock is not always the best use of excess capital. But it is near the top of the list. Especially when you are Apple's massive size; the amount of net cash they have is a staggering amount of money. And when the stock price is low (which I think it is right now); I would not want a big buyback if the shares were trading over $700.

 

One of the watch outs for Apple is size. As it continues to grow it will come under more regulatory scrutiny which could hurt them down the road. By using cash to buy back their shares they are effectively 'shrinking' the company as opposed to using the cash to grow more business. This is not a reason to do the buyback...  In Apple's case, because of their size, I think it is a good outcome.

[Liberty]

IMO buybacks (as long as the stock is cheap) and steadily raising dividends are the best use of capital.

 

Big acquisitions or investing in publicly traded businesses would just be diworsification. This isn't an old textile mill that you want to use as a cash cow to buy good assets (ie. when in a chronically leaky boat, efforts to change boat are better than efforts to patch holes). This is one of the best businesses in the world, so the extra capital should go to increasing the per share interest in that business or be returned to investor so that they can decide what they want to do with it (if it's diversification, that's their choice and they should do it at the level of their own portfolio, but to me Apple becoming a gigantic hedge fund is a bit like Coca Cola buying shrimp farms and movie studios -- it's bound to make things worse).

 

They're already spending all they need on R&D, capex, bolt on acquisitions and acqui-hires, and it isn't making a dent in their cash pile. If they forced themselves to make more acquisitions just because they have cash, it would be like the tail wagging the dog, doing things for the wrong reasons.

 

The low multiples that Mr. Market is attributing to the business won't last forever if they keep delivering, so they should take advantage of them with buybacks while they can. And if they don't deliver, it won't be for lack of cash, so having 140b in the bank or 15b in the bank won't make a difference. Product quality and how much cash they have aren't really directly related past a certain amount that is just a fraction of their reserves, as I've written about a few months ago.

[Guest valueInv]

IMO buybacks (as long as the stock is cheap) and steadily raising dividends are the best use of capital.

 

Big acquisitions or investing in publicly traded businesses would just be diworsification. This isn't an old textile mill that you want to use as a cash cow to buy good assets (ie. when in a chronically leaky boat, efforts to change boat are better than efforts to patch holes). This is one of the best businesses in the world, so the extra capital should go to increasing the per share interest in that business or be returned to investor so that they can decide what they want to do with it (if it's diversification, that's their choice and they should do it at the level of their own portfolio, but to me Apple becoming a gigantic hedge fund is a bit like Coca Cola buying shrimp farms and movie studios -- it's bound to make things worse).

 

They're already spending all they need on R&D, capex, bolt on acquisitions and acqui-hires, and it isn't making a dent in their cash pile. If they forced themselves to make more acquisitions just because they have cash, it would be like the tail wagging the dog, doing things for the wrong reasons.

 

The low multiples that Mr. Market is attributing to the business won't last forever if they keep delivering, so they should take advantage of them with buybacks while they can. And if they don't deliver, it won't be for lack of cash, so having 140b in the bank or 15b in the bank won't make a difference. Product quality and how much cash they have aren't really directly related past a certain amount that is just a fraction of their reserves, as I've written about a few months ago.

 

+1

[Guest valueInv]

This is probably something nobody ever thought they would see in print.

 

“But over the last year, there has been a real deterioration of the Apple brand.”

 

This is also probably something you never thought you would see in print:

 

http://www.bloomberg.com/news/2014-01-23/samsung-profit-misses-estimates-as-new-iphones-win-share.html

 

;)

[Liberty]

The Mac is 30 years old today. Apple made this page with a video to celebrate:

 

http://www.apple.com/30-years/

[VAL9000]

Update to the phone subsidies meme:

 

http://blogs.wsj.com/digits/2014/01/24/subscribers-warm-to-no-subsidy-plans/

 

 

[VAL9000]

I think this would be a very, very smart thing for Apple to pursue seriously:

http://online.wsj.com/news/article_email/SB10001424052702303448204579341290395762338-lMyQjAxMTA0MDIwMzEyNDMyWj

 

If there's one time they really need to execute on a service, it's on offering a comprehensive phone-based payments solution.  They have a huge incumbent advantage.  I expect that if Apple begins to make a serious run at this, Google will respond by buying Square, Stripe, Ebay or a combination.  Microsoft will potentially jump in this game, too.

 

[Guest valueInv]

I think this would be a very, very smart thing for Apple to pursue seriously:

http://online.wsj.com/news/article_email/SB10001424052702303448204579341290395762338-lMyQjAxMTA0MDIwMzEyNDMyWj

 

If there's one time they really need to execute on a service, it's on offering a comprehensive phone-based payments solution.  They have a huge incumbent advantage.  I expect that if Apple begins to make a serious run at this, Google will respond by buying Square, Stripe, Ebay or a combination.  Microsoft will potentially jump in this game, too.

 

Yes, this is a move I have been waiting a long time for.

 

However, I am no longer optimistic that this will be a big business with bit coin on the horizon.

 

BTW, Google has already made several attempts to break into the payments market and failed.

[Guest valueInv]

Update to the phone subsidies meme:

 

http://blogs.wsj.com/digits/2014/01/24/subscribers-warm-to-no-subsidy-plans/

 

It is amazing what changing the label from subsidies to financing can do. The power of words and marketing.....

 

[Palantir]

Would mobile pmts be for online shopping or more "wave your iPhone at the checkout counter" style of payments?

[Guest valueInv]

Would mobile pmts be for online shopping or more "wave your iPhone at the checkout counter" style of payments?

 

Both and more.

[plato1976]

It's likely the U.S. gov will just ban bitcoin in the not so distant future

 

 

 

I think this would be a very, very smart thing for Apple to pursue seriously:

http://online.wsj.com/news/article_email/SB10001424052702303448204579341290395762338-lMyQjAxMTA0MDIwMzEyNDMyWj

 

If there's one time they really need to execute on a service, it's on offering a comprehensive phone-based payments solution.  They have a huge incumbent advantage.  I expect that if Apple begins to make a serious run at this, Google will respond by buying Square, Stripe, Ebay or a combination.  Microsoft will potentially jump in this game, too.

 

Yes, this is a move I have been waiting a long time for.

 

However, I am no longer optimistic that this will be a big business with bit coin on the horizon.

 

BTW, Google has already made several attempts to break into the payments market and failed.

[Guest valueInv]

It's likely the U.S. gov will just ban bitcoin in the not so distant future

 

 

 

I think this would be a very, very smart thing for Apple to pursue seriously:

http://online.wsj.com/news/article_email/SB10001424052702303448204579341290395762338-lMyQjAxMTA0MDIwMzEyNDMyWj

 

If there's one time they really need to execute on a service, it's on offering a comprehensive phone-based payments solution.  They have a huge incumbent advantage.  I expect that if Apple begins to make a serious run at this, Google will respond by buying Square, Stripe, Ebay or a combination.  Microsoft will potentially jump in this game, too.

 

Yes, this is a move I have been waiting a long time for.

 

However, I am no longer optimistic that this will be a big business with bit coin on the horizon.

 

BTW, Google has already made several attempts to break into the payments market and failed.

 

Can they? I have been wondering why they haven't. Why have they tolerated it so far? Is it against the law to create your own currency?

[infinitee00]

Can they? I have been wondering why they haven't. Why have they tolerated it so far? Is it against the law to create your own currency?

 

Probably depends on the definition of currency.

 

Relevant - http://blogs.findlaw.com/legally_weird/2012/01/make-your-own-currency-spend-5-years-in-jail.html

[Guest valueInv]

Samsung and HTC have good company:

 

http://www.bloomberg.com/news/2014-01-27/lg-electronics-posts-surprise-loss-on-currency-moves-marketing.html

[VAL9000]

 

http://www.apple.com/pr/library/2014/01/27Apple-Reports-First-Quarter-Results.html

 

Revenues up 5.7%

 

Profit is flat.

 

Gross margins are down.

 

Revenues in the Americas are down 1.2%.

 

ASPs are lower for all device categories.

 

I think the Americas revenue being down 1.2% is the biggest tell.  My read is that it's the saturation story.  The richest part of the world, where the most revenue is being earned, is now a shrinking market for Apple.  The next year should be really interesting in this operating segment as we see what Apple does to combat pretty-good-but-not-great Android phones.

 

 

* I will note that technically with the Retail Operating Segment, which is primarily US stores, the true Americas segment probably grew..  but not by a lot.

[Palantir]

These earnings are ok IMO, but market is pushing it down, so I may have a buying opportunity. A couple of new product lines, and a cheaper iPhone, would be great. All is well.