Apple Looks Worse Than You Think

Stock (Symbol)

Apple (AAPL)

Stock Price

$94

Sector

Technology

Data is as of

May 5, 2016

Expected to Report

Jul 19 – Jul 25

Company Description

Apple Inc. (Apple) designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. The Company’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, and a variety of accessory, service and support offerings. The Company also sells and delivers digital content and applications through the iTunes Store, App StoreSM, iBookstoreSM, and Mac App Store. It sells its products worldwide through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added re-sellers. Source: Thomson Financial

Sharek’s Take

Apple’s (AAPL) had profits decline 18% last qtr as sales increased just 2%. The company was supposed to earn $2.46 for the qtr, the number got slashed 45 cents last qtr, and then AAPL missed that estimate by 11 cents. With AAPL stock down from around $110 to $94 investors are once again saying the stock is a Buy. Not me. The numbers look worse than you think. For instance 2016’s profit estimate has fallen from $9.85 2qtrs ago to $9.13 last qtr and $8.27 this qtr. Next qtr’s profit estimate has fallen from $2.01 to $1.62 to $1.39 — and this looks especially bad considering the company made $1.85 in the year-ago period. The issue with AAPL is you are having to put a multiple on earnings estimates that keep decreasing. 11x 2016 earnings estimates was $108 2 qtrs ago, $100 last qt, and $91 now. This company doesn’t have a new catalyst, and it needs one badly as iPhones and iPads aren’t getting evolutionarily better so you don’t have to replace them much. I’m very doubtful of the success of an Apple car as progress reports aren’t pretty. Lots of mutual funds and hedge funds already own AAPL, and they are more likely to be selling than buying as the numbers are worse than the average investor thinks.

One Year Chart

AAPL is hitting support here, and it better hold or the next support level is around $75. I didn’t paint the P/E of 11 in green (even though that’s dirt cheap) because profits are falling and estimates are getting worse. This is setting up as a true value play. To me that means a lot of waiting for a recovery.

Fair Value

What’s interesting in this table is the stock stayed around 13x earnings the past five years even as profits almost tripled. Now profits are falling — and estimates are too! So as an analyst you either have to lower the EPS guidance or tack on a lower multiple (P/E). I’ll take the latter. My Fair Value on Apple is $83 which is 10x “current” estimates.

Bottom Line

Apple is now on a steep downtrend that began around a year ago. Right now the stock’s trying to hold on to $94 but from the looks of things it could be headed to my Fair Value of $83. But this is a hard company to get a handle on so who knows, the stock could go up from here. The main issue is profits are not growing and in my book profit growth leads to stock growth. I don’t hold shares of AAPL in client portfolios.