After pullback, even 'value' investors should eye Apple stock - report - Page 2

I wasn't estimating the size of the investment world, just the size of the investment community that is not already highly invested in AAPL. Funds are not allowed (by their own bylaws, by federal law, and/or by their risk ratings) from putting more than X% into any given security. And a lot of folks have taken money out of securities since the big recession. And there's a lot less leverage out there to run up bubbles than there was 10 years ago. That means that the perceived risk of having "all your eggs in one basket" starts to be a greater and greater reason any given fund chooses not to invest in Apple. Since that risk has nothing to do with Apple's fundamentals, I would expect to see the stock price growth increasingly diverge from the earnings growth.

I can see Apple continuing to grow with remarkable financial numbers, but I doubt it will continue, long term, at the same percentage they've been growing, and that's simply because the amount of money they would need to bring in to provide the same sort of return on investment they've provided to their customers would become increasingly more and more impressive and difficult to attain. They certainly do still have remarkable potential, though.

So yes, I expect they will continue to grow. But I don't expect the stock to offer the sort of percentage growth, year-to-year, that it has offered since it was devalued in the recession. Numbers like $1000 become pretty wild speculation (especially short term). Apple would have to continue growing their existing products with remarkable success (quite possible), but would probably also need to disrupt entirely new markets with similarly successful products.

He thinks that the multiple has been hammered down to an insanely low level and that it will recover. This is possible. It's also possible that the multiple won't recover. Time will tell, but I certainly couldn't declare him wrong in advance.

Thompson

And that's completely meaningless within the scope of the point you were making.

Well, as far as I can tell, the decreasing multiple afforded to AAPL over the last few years is a direct consequence of investors (perhaps wrongly) invoking the law of large numbers (exacerbated by concerns over Jobs' health). There's a prevailing attitude that once your company gets so large, you simply can't continue to grow your earnings. In general, that is true, because such companies typically dominate markets that are fully saturated. In Apple's case, that is far from true, so it seems apparent that the multiple compression has occurred before it rightly should. In other words, AAPL is already being treated as a "value" company even while it is still in "growth" stage. All that means is that Wall Street is saying "show me the growth" instead of anticipating it.

Now, per your point: what could happen to *snap* Wall street out of that impression and get them to raise the multiple again? Well, I think that the 2011 performance of iPhone 4 and iPad 2 may just do the trick of showing that Apple is no where near saturated in these markets. The multiple may then "eke' up away from the "Dell's" of the world.

Thompson

2024 rolls around... 20 fantastic new products and services have been added since 2011... Apple still adds 50% year over year... forward p/e = 12.37, trailing p/e = 14.94

One analyst to another analyst,
"hmmmm... AAPL sure looks like a good buy but I remember when they tanked a couple of times in the 80s and 90s and I'm not sure if the 12 years that has passed since Jobs was CEO is enough time to see if the new management team has the right stuff..."

Multiples have been compressing for the last few years, also according to Asymco (and according to me, if that matters). That can only be interpreted as a collective bet by investors that Apple just can't keep the growth rate up. I can understand that sentiment when it's expressed over a period of a few quarters or a year even, but not two or three, when all the evidence is to the contrary.

The point about AMZN is that investors are prepared to get the share price way, way ahead of actual earnings. The the forward PE for AMZN is 51 and the PEG is 2.6. The second number tells you how much of a premium investors are willing to pay for future earnings. That number is sky high. For AAPL the numbers are 13 and 0.7, very low for a company growing earnings as they have been. And there's nothing to say that AAPL's multiples and PEG won't remain just that way, or even go lower. So it may not represent a buying opportunity at all. There's just no saying for sure why Apple's earnings growth is so much less attractive to investors than Amazon's, only that it is.

So yes, if earnings continue to rise, the stock price will probably also rise -- but if the recent past is any guide, not at the rate earnings rise or are projected to rise. Thus, a continued PE compression is quite possible.

Health disclosure is an age-old question, and medical privacy usually wins out.

Company prospects without genius creator is key investor question.

I recently compared Apple with Walt Disney Productions reporting on Walt Disneys 1966 health problems and sudden death as well as stock's reaction.
(The article is at Seeking Alpha: http://seekingalpha.com/article/2472...om-walt-disney)

I'm not. I just don't see his justification, which may be more than I should expect from a digested report on this site. So I'm really just wondering what it is.


Good points. I think you may be on to something with the Jobs situation. If I'm getting testy with Apple management's handling of this, then I can well imagine that a lot of institutional investors are even more so. They're not going to crawl too far out on a limb if they have questions about a company's management. It's impossible to know how much shareholder value has been depressed by this, but I think some for sure.

I've heard this sentiment a lot out there, so I'm certain that the shares are depressed over the uncertainty. But here's the problem I see with the opinions of Apple's mishandling of the situation: I have yet to hear anyone present a specific example of a BETTER way to handle this tragedy that would have caused any less damage than what has already been done, not to mention even provide a modicum of privacy to Mr Jobs. In other words, I think that the desire for specifics in this situation would ever drive for more, more, and still more details... anything short of a prognosis quote directly from Steve's doctor. In short, I'm not believing that the complaint against Apple's handling of this is well-founded and realistic. My hunch is that it just doesn't get any better than this, so Jobs may as well have as much privacy as he wishes.

People say, "Apple could have handled it better, because [fill in the blank]." But I believe that if you invented any specific example of what they could have done differently, I could invent a plausible reason for why it wouldn't have helped, or possibly could have made matters worse.

Thompson

Microsoft had a market cap over $600B on December 22, 1999.
Petro China had a cap of $724B in 2007.

Keeping it can be the hard part.

Can you give us a summary of your insights, instead of link-bait?

Based on that we can decide whether to click or not.

I'm sure you could, and I agree that some of the negative reaction going to be inevitable, due to the nature of the situation. However, Apple has been pressed for some clarity on management succession for some time. I think they could reduce some of the uncertainty there without any plausible downside impact. Nobody that I've heard is demanding medical details (this is the persistent and pernicious straw man argument), but they could say something a bit more descriptive about how Steve can run the company when he's not there, if indeed he can. Investors do worry about leadership issues, and rightfully so. Apple does not need to leave us dangling on this point. It's a choice. Finally, the most drastic (for lack of a better word) measure is to name Tim Cook as CEO and Steve as Chair. I can see an immediate downside to this move, but one that over time creates a sense that the company is not going through leadership flux on an ongoing basis. This also reduces uncertainty. Do you see where I'm going with this? Investors hate uncertainty. They vote against it with their dollars. Apple could readily demonstrate that they are prepared for a post-Steve era, whether it comes tomorrow or ten years from now. For the time being, they are simply not prepared to do this, and it causes investors to worry about whether they are prepared.

You know my stance here: I believe that Jobs will initiate the succession plan upon his return and that we will have Cook as CEO and Jobs as COB.

In an interesting aside regarding Cook's suitability as CEO, I think people forget that he graduated with a degree in Industrial Design. I am not suggesting that he could directly replace Jobs but, between his formal education and his "internship" with Jobs, I suspect he knows how to do design-led products. At the very least, it relieves me that the most like CEO candidate has a background in engineering and design rather than just accounting or finance.

This is an important angle for people to think about, especially if they are prone to bellyaching about periods of time when AAPL's price seems to move sideways. It should be noted that people are not just taking money out of funds, due to the poor economy. Many people, who would ordinarily contribute a percentage of their wages to retirement plans who invest in funds, are out of work. When these people begin working again, they will begin making fund contributions again, giving the funds more headroom to make further investments in AAPL. Of course, a better economy will also embolden retail investors, many of whom took profits in AAPL, to reenter the market.

I can totally see that scene going down.

Thompson

No I totally get where you are coming from, and I agree with the principle. But I disagree with the reality of it all. I mean honestly, if your premise is that there is a better way to handle the disclosure, then it would be reasonable to assume that the board of directors would have to sit down and engage in a debate on the possible alternatives. And someone would have to get specific. If anyone suggested something generic like "this way is the worst possible way and there must be better answers", then a logical response would be, "in that case, it should be easy for you to name just one". Otherwise, someone might suggest something specific, and then they would debate the merits. And so you have suggested two. Let's consider...

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(1) but they could say something a bit more descriptive about how Steve can run the company when he's not there, if indeed he can.

I believe this would do absolutely nothing for the shares. Most investors are not worried about the day-to-day running of the Apple ship. They already know Tim can handle that aspect (better than Steve, truth be told). Investors are worried about Apple's future ability to continue redefining (or inventing) markets, looking years ahead, and the primary question in that regard is whether Steve Jobs is terminal. (I hate to be so blunt, but there you have it, IMO.) Investors are keen to know whether Steve is seeing his last days and whether the Apple magic is ending with iPhone, iPad, and whatever else is already on the Jobs-inspired pipeline (which may go out another 5 years, for all we know).

(2) Finally, the most drastic (for lack of a better word) measure is to name Tim Cook as CEO and Steve as Chair. I can see an immediate downside to this move, but one that over time creates a sense that the company is not going through leadership flux on an ongoing basis.

Again, I don't see this helping, for the same reasons. People are worried that Steve Jobs is going away, period. You make this move, and instantly some of the Fudsters in the media will suggest that Steve is dying, and the stock will get instantly hammered. And unless Apple refutes that interpretation with some details (which they won't) then the uncertainty that you are speaking of will remain. I think everybody is pretty darn sure what the succession plans are. It will be Tim, and he'll do better than just about anyone on the planet... except Apple will be missing Steve Jobs. I don't think there's any mode of communication or title spinning that would change that stark fear in investors minds.

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In my opinion, the bottom line is whether Steve Jobs is really going to continue his role, or whether he is on his last legs as an Apple visionary. That is the source of the uncertainty, not this other stuff that pundits point to. (They are fooling themselves if they think the things you suggested above will really sate their thirst for information.) And the only way to remove that uncertainty is to get the details that Steve is not about to give - nor should he have to.

Thompson

At that time trailing PE was about 50X. On that basis AAPL would be worth $1 trillion today. I believe CSCO had a huge market cap about then , also.

Guys, lest we forget...

Tim Cook is ALREADY THERE.
Steve Jobs is STILL THERE.
Jonathan Ive is STILL THERE.
Phil Schiller is STILL THERE.

When Steve finally leaves, for whatever reason, these guys may change their titles, but they aren't going to change their duties much. They will try their best to emulate the forward vision that Steve has, but they aren't going to replace him. Succession plans or no, uncertainty or no, Apple will be a less than what it was with Jobs (the magnitude of which is open for debate). My personal feeling is that they'll still kick butt and take names because of the skills of the others mentioned above. And the stock will ultimately recover.

But I don't believe for a second that there's any particular hoops that the directors could jump through to satisfy nervous investors here. I just don't.

Thompson

My point was mostly that people severely underrate Cook and what his leadership might look like. The fact that he has engineering and industrial design cred will count for something even though we know that he is not likely the product visionary that Steve is. He also lacks the charisma of Jobs.

After Jobs is gone, I suspect Ive will do product introductions. He comes closest to Steve in terms of charisma although he has a completely different vibe. For instance, when Steve says "amazing" it's like "Wow! Gee whiz!" whereas when Ive says "amazing" it's more like "how obvious". It's a much cooler and more detached affect.

For those that feel certain that Apple will be diminished upon Jobs' departure, I am not so sure - there will be pluses and minuses. It will no doubt be different but if Steve has truly instilled into the Apple culture his vision for product excellence, Apple will be just fine.

I hope that Steve comes back soon and puts the succession plan into motion. This will remove some of the uncertainty although Cook will be considered an unknown until his regime is seen leading product design and development (i.e., the product pipeline does not carry Jobs imprint). That will be the only thing that could dissuade the naysayers and, unfortunately, I don't think there is any shortcut - Apple will simply have to live through it.

I don't have any serious doubts about Cook's ability to run Apple. In fact, the evidence is, for all intents and purposes, that he has been running Apple for the last couple of years possibly. I'm saying that it's beginning to look like Steve will try to hang on until it's obvious to everyone that Apple needs to have a CEO who can be on campus full time, and the issue gets forced. This is not a radical idea -- it's an entirely normal and pragmatic one for business. Lots of talented businesspeople had to know when the time was right to allow someone else to step up. The message we're getting from Apple now is "not yet." So the natural question is, "why not yet?"


I felt I was quite specific in my suggestions.

I'm concerned not with tomorrow or next week or even next month. If Apple announced tomorrow that Cook is now CEO and Steve is staying on as the chair of the board, I suspect that the initial market reaction would verge on panic. But over a matter of months, if not less, the reality would sink in that maybe Apple isn't really a cult of personality dressed up as a corporation, that it really does have a solid culture and talented leadership team, which has been overshadowed by Steve and his rock star status. I think all this fretting, which is being artificially prolonged, would come to an end. And this, in the long run, would be better for investors who could stop hanging on the latest rumors about Steve's health and focus on the company's products and how much money they make. Normal stuff.

I don't think it's fully appreciated how much Steve's health issues have taken over the narrative about Apple. Every company, even one as high-profile as Apple, gets only so much bandwidth to get their message across. In Apple's case, you can see how much of it is absorbed by speculation about Steve's condition. Just look at the recent stories about their earnings report -- half of most of them don't talk so much about products or profits, as about Steve's cancer. Over time, that has a corrosive affect, as the story that Apple is nothing without Steve sounds more and more valid, and is virtually endorsed by Apple through its actions and inactions.

I hear what you are saying, but I don't think that's really the prime influence on the stock, do you? I think it pales in comparison to what I was speaking of. I think that most people believe Apple's daily operations are fine in the hands of the management team sans Steve. But I think not enough people realize that Apple won't need another killer product for several years in order to grow earnings. (This harkens back to the earlier topic.) People actually believe that another killer product is required in order for Apple to keep it's mojo, and many people believe that Steve is required for the genesis of killer products. (The truth of the matter is not as important as the perception, when it comes to the stock market.)


I do too, which is what I ultimately said, and is why I addressed them. (The other comment about people not being specific was aimed at all of those folks - most of them actually - that are not being specific.)


I believe that, and you believe that, but I think a significant enough fraction of people don't believe it strongly enough, so...


I disagree, regardless of any communication we get from Apple management. Not as long as Steve's health issues are hanging over our heads. There will still be enough worriers that the stock will be depressed compared to what might have been. (That's not to say I think it's going down from here. It will go up... just perhaps not as much as if Steve's health was good.)

Eventually, Steve will be gone from Apple (hopefully long from now, but regardless...) and then people will see how strong the company truly is. But for now, the fear of that imminence is hanging over the stock, and no words about titles and succession plans post-Steve are going to calm those fears.

Thompson

I think we mostly agree in general but this is an area where I wholeheartedly agree. It's not just the company narrative that is drowned out but also attention potentially diverted from product launches.

I am still hoping that Steve's absence will be short and that he will pass the reins shortly after his return. It is interesting to imagine what type of chairman Jobs will be without also holding the CEO title.

I wish they'd worry a bit more. The day Apple announced Steve's leave, I said that I'd be 'in' big if the stock hit $310. I'm still waiting.

I have great confidence in Apple long-term but I think this year is likely to be a roller coaster ride.

$310 may be a bridge too far. While a stock price seems arbitrary, it is actually fairly loosely connected to the performance of the company. And given Apple's earnings performance, $310 would put the stock price at the all time Apple low relative to performance. Simply put, there's not much negative juice to squeeze out of that lemon for any reason. The Steve Jobs' handicap as well as the "Law of Large Numbers" handicap are already in full force, as amply demonstrated by last week's announcement and rapid recovery.

Thompson

Not the prime influence, no -- but arguably the principal one which keeps the valuation down. I mean, I think some theory is needed to explain it. I can't think of another that accounts for the last several years of declining multiples. It isn't a short-term trend, and about the only major theme I can find which persists over that period of time is the anxiety over Steve's health. It's the only constant detractor in what has otherwise been a picture so rosy that it's almost ridiculous.

I'm not thinking two years out as much as I'm thinking two or three back. If AAPL today had even the very modest PEG of 1.0, then the stock would be selling for well over $400 a share right now. I'm not sure it's possible to find a historical chart of PEG, but I'm guessing it hasn't been much over 1.0 at any time in the last three years, which means that investors are consistently discounting earnings growth. It's becoming the AAPL storyline, and storylines are hard to change.


Well, I think you may agree with me more than you realize. My thinking is that Apple should take the health issue off the agenda by making it a moot point. At the moment I think the markets are concerned that Apple isn't taking the issue of leadership seriously, as something demanding attention. The lizard brain of the market is always looking for signs of weakness, a chink in the armor. This slow twisting in the wind sure looks like one, even to me, and I wish I could think otherwise.

A relatively powerful one, I suspect. The board was effectively picked by him, and I believe would remain quite deferential. Perhaps too much so, in fact.

But this is exactly the point. Apple are keeping the Job's health story as minimal as possible. Can you imagine the media furore that would/will erupt if/when Cook was/is announced as CEO?

It may may be the topic of conversation of serious investors but in the real world it is not having an effect on sales. Apple is not particularly focussed on investors - as long as growth is maintained that's pretty much the end of their obligations as far as they are concerned.

"Pullback"? "Hit"?

AAPL is at 338 right now. With the all time high at 348, it's down less than three percent from that. Sure it may go up even more, but it seems a bit ridiculous to paint the current price as a low somehow.

In your 2024 scenario, Apple will have over $19 trillion in revenue. The absurdity of that number alone should tell you why Wall Street does not believe that the growth rate is sustainable. The only way they hit $19 trillion in revenue is if the dollar collapses and we have high double digit inflation, which would also make Wall Street rather unhappy. No one in their right mind would buy AAPL thinking it will sustain 50% annual growth for the next 10+ years.

Yes, you are massively underestimating the size of the investment world. There are thousands of funds that do not hold a single AAPL share. Equity markets alone are hundreds of trillions even today. To reach a point where they run out of potential investors, they would need to be 100 times bigger than they are today.

If that's the plan, it sure isn't working. When information is lacking, rumor and speculation fills the void -- and that's exactly what's happening here. Then questions arise as to whether Apple has provided accurate information to investors, what little they have provided. The SEC is investigating that one now. So not necessary.

Investors appreciate companies with stable leaderships. In Apple's case, that calls for a change. Putting it off is not wearing well, especially after three years of questions without answers. If Apple named Cook as CEO and Steve as chair, the markets might gasp, but they'd get over it pretty quickly. Steve wouldn't be going away, just moving to a position that better suits his ability to work. Stories would be written about how Cook is one of Steve's hand-picked lieutenants, his heir apparent, and has been actually running the company for years now. It wouldn't take long for the storyline to change. As the song goes, the waiting is the hardest part.

I think it's fairly funny that you actually took the time to calculate the earnings in my scenario...

Well, using the PEG as a guideline makes sense only if you assume that one can extrapolate growth into the future. I think that there are two reasons why investors are reluctant to do that:

(1) They fear the law of large numbers, so they are reluctant to assume further growth, and
(2) They fear that Steve is going to die relatively soon (there, I said it) and that Apple will then stop banging out killer new products to grow the business.

Both of these premises are wrong on so many levels (even if, God forbid, Steve does indeed pass) but these fears exist and are the primary reasons, IMO, why Apple's multiple is being compressed. Neither will be addressed by the communication you seek. Both uncertainties will remain.


Oh, I agree with you a great deal. There is only one thing I disagree with, and it makes all of the difference in our conclusions. Here it is...


My thinking is that the market's true fear is not one of "leadership" in the traditional sense, i.e. one that can be addressed by succession plans, titles, declared job descriptions, etc. I believe that the market fears that Jobs brings something intangible, unique, and utterly irreplaceable to Apple's future earnings.

In other words, I think that there is nothing that Apple can do to make this issue moot.

Time will bring the truth, and IMO time will show that Apple will continue to grow earnings tremendously for the next few years, in spite of the two fears I listed above. The market will, in turn, retroactively reward AAPL with a higher share price, but I don't think the multiple will get much higher. (Not unless the entire market goes into hype mode again, like the dot com era, or the housing boom.) The good news is that if you are a person with some additional spending cash, and you realize that the market is not forward looking enough, you can capitalize on the situation by buying a little AAPL along the way (while it is still under appreciated). Dollar cost averaging will work nicely through the Jobs health-related dips and put you ahead on the other side.

Thompson

Who doesn't already believe that Tim Cook would be a superb CEO, in the traditional sense of the title? Who doesn't know that he has already been performing in such a capacity for years, with Steve pulling the duties of Grand Master Strategist unmatched by any other CEO? Who doesn't already believe that Tim Cook IS the heir apparent? Who believes that Apple without Jobs will be as good as Apple with Jobs?

It is the last question that is really debatable, really matters, and is the source of all of the uncertainty. The other questions are posed because people want to be polite and not come out and say it: investors are afraid Steve Jobs is going to disappear completely... and relatively soon.

Thompson

Since this essentially summarizes your other points... Let me say I think we can read the same tea leaves different ways and neither of us will know who was right until the thing happens. That said, my approach tends to be historically biased, so take that as you will. To wit:

Every successful company goes through a transition from founders to successors. The ones that make the transition smoothly go forward to further success. Others never figure this out and fade. We've seen both scenarios play out with Apple, as it happens. Their first attempt was botched and nearly fatal. Apple is now getting a rare second chance to do it right. If you ask me, they're presently getting at best a C- for their efforts. It seems the hand on the tiller is weak, and perhaps that they're trying too hard to keep Steve in the CEO spot even though everyone who cares to knows that he hasn't really been filling that office for some time. That looks indecisive, no matter how you cut it. Maybe even indifferent, which is much worse.

As for PEG, I was looking backwards, not forwards. The PEG for AAPL has been low for years. Investors began to discount earnings growth a long time ago, when earnings were probably half or less what they are now. As you say, it only gets harder to keep earnings growing at this rate. I'm afraid much of the appreciation we might have seen over the last few years has already been lost.

The average P/E ratio for Apple prior to the Great Recession was 30. The Friday before their Q1 2011 earnings, Apple hit $348/share and had a P\\E of 23. Today, their shares were about $341/share but the P/E ratio has dropped to 19.

It doesn't take a lot of analysis to figure out that Apple's shares are devalued primarily because of the recession. As the recession clears, I look for Apple's shares to revalue back towards 30.

Note that I said "towards". Right now, to regain a P/E ratio of 23 the stock price would have to increase by 21%. But Apple's not just sitting around. Next quarter they will add both to their earnngs and their cash, probably by the traditional blowout.

The question is, how is it even going to be remotely possible to catch up to that historic P/E of 30, if this is the earning power of Apple at the tail end of the worst recession since the Great Depression? And yet, until it does, the market will by definition by vastly discounting Apple stock.

And don't fool yourself; the smart money is acutely aware of this. There will be plenty of investment capital to drive Apple well past $1,000/share.