Monday 18 December 2017

Share Watch: Apple seems to have been around forever

Apple 5-year share price
Apple 5-year share price

John Lynch

Apple will be a mere 40 years old next Friday, April fool's day. In that time, the tech giant and its friends and imitators have made confetti out of the rule book.

Before Steve Jobs and his friends, there was some predictability about how things were done in business. There were limits and the secret was to master the best type of industrial engineering possible; or, put another way, the prize went to those who could produce the cheapest 'widget'.

Apple and its high-tech contemporaries opted not just respond to a demand; they invented the demand. There's barely a thing we do these days that hasn't been touched by the revolution.

It's utterly changed the way we think about or use music, films, mobile phones or computers. In the area of manufacturing where product durability still had a certain cachet, the new boys chose to build in obsolescence at dizzying speed. Apple now updates its main product every two years. But it does more.

It produces profits that would make the late, lamented King Croesus weep.

Just as you read this, the company has $215bn sloshing around its balance sheet. If it chose to spend that nest egg it could snap up Ford, General Motors and the Caterpillar Tractor giant and still have enough change to be able to buy up Nissan. Any run through the numbers coming out of Apple leads to a lot of head-shaking.

Apple's 2015 results were sparkling with revenue growing 28pc to an enormous $234bn and earnings per share up 38pc. iPhone sales last year were an astounding $143bn. Since it was first released in 2007 the iPhone has grown to represent 60pc of Apple's total revenue.

The general view is that its growth margin is higher relative to other products so helping the company retain its respectable 40pc gross margin.

It is hard to believe that only five years ago Apple launched the iPad, which from scratch has grown revenue to a significant $19bn today. Analysts believe the iPad will continue to penetrate new markets by adding features like Apple payments and Microsoft Office. Apple's Mac product line continues to impress, particularly the Macbook Air. Sales last year were $20bn and over the last five years have outperformed the desktop business by a substantial margin. Revenue generated by Apple services is a large $23bn with 60pc generated by iTunes.

Finally, international sales account for 60pc of total revenue, up from 50pc ten years ago. International growth should continue, as the company becomes more reliant on growth outside North America; hence the recent launch of the 'cheaper' iPhone.

Today the company's market value is a huge $590bn with a modest price earnings multiple of 11. Its shares are trading at $105, down from its yearly high of $134. However, investors are happy that the company's $200bn buyback programme continues with $153bn already returned. Apple plan "to be very active" in the debt markets this year to fund its capital return, according to CFO Luca Maestri - at one time the financial director to the well-known Arnold O'Byrne at Opel (Ireland). Apple's tax problems have been much debated but with such a large hoard, mostly held outside the US, repatriation and tax could be a problem in the future.

Analysts believe Apple still has the potential of improving its dividend yields driven by the buyback programme. They are also of the opinion the company is undervalued relative to its peers, has limited downside and with its large cash balances, the share at the current price is still attractive for investors.

While the company is grappling with the US government on a privacy issue, the only other negative caveat is a world macro-economic weakness. However, it's hard to ignore this stock.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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