Apple’s Profits Are So Crappy, Comparisons are Easy

Stock (Symbol)

Apple (AAPL)

Stock Price

$195

Sector
Technology
Data is as of
August 6, 2019
Expected to Report
October 30
Company Description
Apple’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. Source: Thomson Financial
Sharek’s Take
David SharekApple’s (AAPL) profit growth is so crappy right now that if next year’s results are less crappy the company might be able to grow profits once again. Last qtr AAPL delivered -7% profit growth as sales increased a minuscule 1%. This company has had record profits in only three of the past seven years, with profits expected to decline 2% this year. But next year, profits are expected to climb 10%. That would be good. Apple had some crappy stats and some good stats last qtr:

  • Total revenue declined 1% year-over-year. Product sales fell 2% while Services rose 13%. Products are 79% of total sales.
  • Net income was -13% year-over-year%, but since management bought back stock EPS growth was -7%.
  • iPhone revenue (48% of total Apple sales vs. 55% a year ago) declined 12% yoy.
  • Services revenue (21% of total revenue vs. 19% last year) increased 13%.
  • Mac sales (11% of sales vs. 10% a year-ago) had 11% growth.
  • Wearables, Home and Accessories (10% of sales, up from 7% last year) had 48% sales growth. Wearables include Apple Watch, AirPods and Beats products.
  • iPad revenue (9% of total revenue, same as last year) grew 8%.

With an Estimated Long-Term Growth Rate of 10%, a dividend yield of around 1.5% and a P/E of only 15, this stock looks to be on sale. My Fair Value is a P/E of 17, which would be $218 in 2020 and $245 in 2020. With the stock at $195, there’s nice upside here. The company also might have a catalyst in its Apple credit card, which is debuting today. The company won’t hold the loans, it will outsource that and take a cut. Still, that could be a nice revenue stream. And since AAPL doesn’t have credit card revenues now, that could make year-over-year comparisons look even better. Apple is looking good here, I will purchase the stock in the Conservative Growth Portfolio.

One Year Chart
This stock’s lower than it was a year ago. But 2019 profits are expected to clock in 2% lower than a year ago. So that sounds about right. Notice along the bottom how profit growth is expected to accelerate during the next two qtrs. That would be good.

The Est. LTG of 10% is down from 12% last qtr. Ten percent growth is OK, I just want consistent growth. Notice Annual Profits hit All-Time highs in only 3 of the last 7 years. That’s bad.

AAPL has a September 30th fiscal year end, so I’m not looking ahead to 2020 to calculate my P/E, which is 15. That’s reasonable.

Earnings Table
Last qtr AAPL delivered -7% profit growth, and beat estimates of -10%, as sales growth was -1%.

Annual Profit Estimates got gashed four qtrs ago. Now they seem to have stabilized.

Qtrly profit Estimates are for -3%, 8%, 15% and 13% profit growth the next 4 qtrs. Increased tariffs from China might bring profit estimates lower and/or profits lower. So there’s political risk with this stock.

Fair Value
Apple supporters say services revenue is more predictable, and since service revenue is becoming a bigger piece of the pie AAPL stock should hold a higher valuation (P/E). I don’t think that’s the case when iPhones are around half company sales and iPhone sales declined 12% last qtr.

My Fair Value increases this qtr from a P/E of 15 to a P/E of 17. This stock seems to have ample upside here.

Bottom Line
Apple (AAPL) has had its ups-and-downs the past decade, but overall buy-and-hold investors have done well.

Apple is now trying to transition into a more well-rounded company. The problem is the company doesn’t have a new catalyst as it did in the past. Service revenue and accessories are good, but iPhone sales continue to deteriorate. I think the Apple credit card will be a catalyst that could push profits up a little bit. 

AAPL will be added back into the Conservative Growth Portfolio. It will rank 12th in the Power Rankings. Since this is now considered to be a 10% grower (Est. LTG) the stock doesn’t have what it takes for the Growth Portfolio.

 Power Rankings
Growth Stock Portfolio

N/A

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

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