Monday, April 2, 2018

Fiscal 2Q 2018 Final Estimates

As of Thursday's market close of $167.78, AAPL is trading at a 12.3x multiple on my next-twelve-months EPS estimate (10.8x when excluding next-12m net cash and div).

The key immediate question for this earnings report is the capital return update, in particular the planned level of share repurchase necessary to achieve management's stated goal of reaching zero net cash balance over time. My relatively straightforward model assumes the bulk of free cash flow (FCF) will be dedicated to buybacks, with a smaller allocation reserved for a steady level of M/A activity, dividend payments, and some debt retirement—as it matures or slightly faster.

The base level of buybacks required to maintain a constant net cash balance given the projected FCF generation in my model (net of those reserves mentioned) is in the range of $50–55 billion per year. On top of that, in order to deplete the current net cash balance of $163b, at least an additional $150b would have to be spent in buybacks—barring some huge acquisition which I would consider tragically wasteful. Management's statements of doing this “over time” suggests a tender offer is not part of the plan, so to move this mountain of additional repurchases would take several years, at least 3 and likely half a decade. On the other hand, front-loading the spending on buybacks (within what's reasonable and allowed by SEC regulations) optimizes the number of shares retired given that I project an increasing share price, perhaps after a plateau this year. In short, I'm expecting an authorization to a total $500 billion in repurchases since the end of 2012—an increase of nearly $300b (including roughly $115b, $95b, and $75b spent during CY18-20 respectively)—and an additional 2 year extension up to March 2021. I expect further extensions and more modest increases to the program at this time each year.

As for the quarterly dividends, I expect an increase of 14% from $0.63 to $0.72 per share this year followed by similar increases for the next couple of years, which keeps a fairly constant pace for the total amount spent per year, and then possibly 20% annual increases over the following couple of years to get the yield back above 2%, representing only $2b increases each year in the total amount spent (currently $13b) thanks to the near completion of the extraordinary repurchase activity having achieved its intended effect on the number of shares outstanding. After that, the per share dividend would increase at the same rate that FCF grows, boosted by the compounding effect of the recurring repurchases at over $50b per year.

Not much has changed in my model about the fundamental business drivers. Of course, market participants are now scrambling to rationalize, atone for, or assign blame on last year's collective super-cycle delusions—which fortunately was never a significant driver in my model. The main changes I've made since last year are higher iPhone ASPs and slightly slower unit growth for this year, partly reversing it for the following cycles with not much consequence in the long term. In my opinion, the confirmation of steady, moderate progress rather than fleeting flashes of hyper growth followed by stagnation or declines is a positive development, as this non-hit-driven path is a much preferable approach to predictable and sustainable growth for Apple and its long-term shareholders.

Remember, all of the previously discussed potential boost from capital return will, without a doubt, get dismissed by many pundits and naysayers as financial engineering solely for the purpose of artificially supporting the stock for the benefit of management compensation (because they instead much prefer to see Apple bail out Tesla and Netflix so those dreamy businesses can be funded with zero financial risk, and be able to later say, in case those fail, that Apple crippled them). And the unstated but implied premise is absolutely correct: without a fundamentally-driven growth outcome, all of those billions spent on buybacks are nothing but a gigantic waste of the cash. The only way it can have a positive effect is if the stock price eventually rises meaningfully above the price paid (as has been the case for the $176b worth of past buybacks at an average cost of $102 per share). It requires sustainable upside sometime in the future preferably driven by fundamentals, or—perhaps less convincingly—by reversing the current market inefficiency.

This perennial market skepticism is precisely why I will not yet consider a more sensible valuation multiple for Apple's enterprise value much higher than 10 times earnings. I remain convinced it will take years of solid performance, and coherent, opportunistic and deliberate actions by management before the market allows the value of those decisions to get fully priced into the stock at a market-comparable multiple. Given my current price target and longer term projection (see chart below), it seems likely that the payoff from these next repurchases will be delayed for at least a couple of years. This is no problem—in fact it'd be the best scenario—since the full program will take a few years to execute, and getting an immediate reaction on the stock toward a market-comparable multiple before all that investment gets deployed would work against its potential return.

In this light, all the annoying handwringing about “the super-cycle's bust” and inane claims of “weak iPhone X” are actually a blessing. It really makes no big difference to Apple's business performance—other than for fiduciary duties—what happens to all that extra unneeded cash or what kind of return it can get out of it, nor does Apple depend on its stock price to fund its operations—as opposed to some other darling companies. Apple will keep all the cash it needs to smoothly run the business, will keep on investing a healthy amount to continue to innovate and grow, and will return the excess to shareholders. And it'll do that the most efficient way—through buybacks. But to us long-term shareholders it does matter a great deal where the stock goes and what it costs us, as it is our money and investment. And to make the best of it, we'd love a dirt-cheap stock for the next couple of years.

So, I say thank you, pundits and naysayers, for doing our bidding during the next few years (after that I'll promptly go back to despising your deceitful, manipulative ways). With your doggedly dour doomsaying you're helping Apple help us greedy AAPL holders get the best return we can on our investment.

Detailed estimates:

3mo ending Mar-2018  Rev($M)  GM(%)  EPS($)
-------------------  -------  -----  ------
Analysts consensus    61,193      -   2.70
Apple guide low       60,000   38.0   2.61*
Apple guide high      62,000   38.5   2.77*
My estimates          61,702   38.6   2.79 (5.05b shares)

3mo ending Jun-2018  Rev($M)  GM(%)   EPS($)
-------------------  -------  -----   ------
Analysts consensus    52,310      -    2.19
Apple guide low (e)   51,000   38.0    2.17*
Apple guide high(e)   53,000   38.5    2.34*
My estimates          53,155   38.5    2.36 (4.88b shares)

*EPS guidance ranges derived from other figures provided
 by Apple and diluted shares outstanding estimated by me

Thursday, January 25, 2018

Fiscal 1Q 2018 Final Estimates

As of yesterday's market close of $174.22, AAPL is trading at a 14.1x multiple on my next-twelve-months EPS estimate (11.7x when excluding next-12m net cash and div).

On tax reform effects, Apple seems to have provisioned past foreign taxes very presciently as the $38b it announced will pay (presumed over 5 years though regulations allow it over 8 years) is very much in line with the foreign tax deferred liability they would have as of December (was $36b as of September). On the going-forward effective rate, I'm modeling a gradual decline from 22% (current quarter) to about 20% in a year, but I can see it going down to 18% depending on many particularly complex details of the new tax treatment for foreign income.

As for what to do with all the freed-up cash, other than increased R&D and capital spending (mostly already in my model) I'm going with a dividend per share increase of 16% next April and about 20% per year for the following 3 years (raised it 10.5% last year) essentially doubling the current per share amount by 2021 and achieving a 2% yield on my stock price projection. In addition, I model a $110b increase ($35b base annual increase and $75b due to tax reform) to the share repurchase program to a total of $320b through March 2020 (was $210b through March 2019). Assuming my stock price forecast isn't too far off from reality, this would reduce the shares outstanding after the next 3 years to about 4.3b shares, and would limit the incremental total dividend cost to Apple to only about $5b over 3 years (ttm cost is $12.8b).

On iPhone cycle and all the other products business, seems my experiment last September of taking a shot at it well before it all went down was rather succesful, as my guesses were pretty good, particularly guidance. So no major changes to the fundamental business basis for the model other than another bump to ASPs. Be prepared to see many pundits dismissing all of 2018 positives as mere financial engineering, and an intensification of the already schizophrenic negativity for the next cycle.

Detailed estimates:

3mo ending Dec-2017  Rev($M)  GM(%)  EPS($)
-------------------  -------  -----  ------
Analysts consensus    86,750      -   3.80
Apple guide low       84,000   38.0   3.61*
Apple guide high      87,000   38.5   3.82*
My estimates          87,358   38.8   3.98 (5.14b shares)

Tuesday, September 5, 2017

Fiscal 4Q 2017 Final Estimates

As of Friday's market close of $164.05, AAPL is trading at a 15.1x multiple on my next-twelve-months EPS estimate (12.0x when excluding next-12m net cash and div).

I decided to challenge myself by posting my final estimates nearly two months instead of the usual two weeks or so before the report because the events during these two months (keynote, launch, ramp, and report) appear to be some of the most influential for Apple in years, with significant details like precise launch timing, product pricing, reception and supply sufficiency, all helpful in correctly estimating the final few days of Fiscal 2017, the initial shape of the much hyped 2018 supercycle, and a first glimpse into the sort of tough compare arguments looking into 2019 that inevitably will be raised as soon as Q1 guidance is provided (in fact this has already been happening).

It may seem counter-productive to attempt estimates before all the critical events and information are in the past and can get digested and distilled into my model. Why not just do as usual and incorporate it all in mid October? There'd be absolutely no risk to the accuracy of my final estimates by waiting. On the contrary, coming out early leaves the forecast at the mercy of some of my most subjective, perhaps some conservative, others more hopeful, and possibly even a few strained assumptions. Like, what if the launch is on the last two days of Q4 and not the week before? Or what if Apple announces record-smashing pre-orders or sales that would clearly call for adjustments in both Q4 and Q1 numbers? Or if the event disappoints some tech pundits who take it to the interwebs with rage against Apple? (Ok that one's a given, of course.) Maybe some manufacturing glitch turns up in early October and phones start blowing up in flames? OMG! (Even though Samsung came out nearly unscathed from that, Apple would be crucified. But no, that won't happen.) Or, they call it the iFacePhone? *facepalm*

Monday, July 17, 2017

Fiscal 3Q 2017 Final Estimates

As of Friday's market close of $149.04, AAPL is trading at a 14.8x multiple on my next-twelve-months EPS estimate (11.4x when excluding next-12m net cash and div).

I've not much to say that hasn't been said elsewhere. iPhone 7s/7s+/8/Pro/X is the obvious next catalyst, with an event in early Sep as always, 7s/7s+ available end of Sep and 8/Pro/whatever version available in Oct/Nov. Not going to delve into the arguments about potential changes due to new tech. But please do go and read all about it elsewhere.

US Dollar finally weakening should be a relief from last few years relentless FX headwinds, at least for Q4 guidance and Dec quarter. Beyond that it's anyone's guess given the shifting expectations on key US policies. Still not baking in anything regarding tax reform (both foreign and domestic) until a more definite timeline is provided by management. Comments last cc about "sometime this year" were likely a bit premature. Looks like a one-two 2018 story about iPhone supercycle and tax reform.

Fiscal 2019 consensus estimates for at least mid single-digits growth seem key for continued stock appreciation. Those will be publicly available in financial sites after Q4 gets reported (likely on Oct 31). Of course, Dec quarter guidance given that same day is immensely important, but everyone already knows this. Right? Ok. Just remember to also get a peek at 2019 estimates then, and allow a couple weeks for analysts' model updates to trickle through the data services and finally show up in the public sites. In fact, I'll repeat this paragraph verbatim when I post my current quarter estimates around mid-Oct.

Enjoy the Summer. Big, exciting Fall coming!

Detailed estimates:

3mo ending Jun-2017 Rev($M)  GM(%)  EPS($)
-------------------  -------  -----  ------
Analysts consensus    44,920      -   1.57
Apple guide low       43,500   37.5   1.45*
Apple guide high      45,500   38.5   1.61*
My estimates          45,455   38.6   1.62 (5.22b shares)

Monday, April 24, 2017

Fiscal 2Q 2017 Final Estimates

As of today's market close of $143.64, AAPL is trading at a 13.8x multiple on my next-twelve-months EPS estimate (10.5x when excluding next-12m net cash and div).

For the first time ever I've decided to "collar" ($140-145) at least half of my AAPL position given that it's trading above my FV and not too far from my 12-month target, but mostly because it represents over 80% of my portfolio, so this is the best opportunity I can see for me to diversify. I'd still remain hugely overweight with roughly a 40% AAPL weight (while AAPL just 3.5% of the S&P). The only problem is I have no idea what to do with the proceeds, and most likely would end up reinvesting in AAPL on pullbacks. So much for trying to diversify. This is in no way intended as investment advice for anyone, just a disclosure of my decision. Please do your own due diligence.

I expect an additional $35-40b buyback authorization extended another year to March 2019, and a 9% increase to the quarterly dividend to 62 cents. Still no way for me to confidently model any repatriation plans. Most likely there'd be a big one-time tax gain which would need to be excluded from trailing EPS, so I see no easy way to get this event to affect my valuation model. In reality, it affects the market's perception of the value of the trapped offshore cash, but because I fully exclude it (net cash valued at 100%) in my model, it only shows up as a negative (the cash hit due to the actual repat tax paid). Consider this a sort of built-in conservativeness in my model. Or a flaw, if you prefer. Maybe I'll figure something out when it happens. What would definitely affect my valuation is a permanent reduction of the corporate tax rate, but again, not going to speculate how much lower or when it might happen. We'll have to wait and see how it all pans out.

Next year or two projections are on pretty standard assumptions, just slightly above WS analysts consensus. I'd be much more confident in this whole "supercycle" theory if it weren't so hyped by now. I tend to become a bit skeptic when I see this kind of unoriginal analysis and groupthink in WS and tech media. Can't stand the way everyone hangs it all on the never ending rumor mill. At this point I just want to fast-forward to October and January and get it all over with. Not asking much, just show me at least high single-digit revenue growth and steady margins next year and I'll be happy. One thing worth mentioning is the newly discovered Services growth narrative (yet double-digit growth's been there forever). Even if it just compensates for other products declines (e.g. iPad) this is a big positive since it replaces lower margin with higher margin revenues. Having said that, iPhone is still "it" for now, in terms of meaningful growth.

Detailed estimates:

3mo ending Mar-2017  Rev($M)  GM(%)  EPS($)
-------------------  -------  -----  ------
Analysts consensus    52,970      -   2.02
Apple guide low       51,500   38.0   1.90*
Apple guide high      53,500   39.0   2.07*
My estimates          53,689   39.0   2.09 (5.24b shares)