Apple Q3 sales ahead of expectations

And then we had the results of Apple inc. for their third quarter last evening after the market closed. Possibly the most anticipated results of the "season" so far. Surprising on the upside, but truth be told, the expectations bar had been set pretty low. Possibly the chattering classes who are looking for newer gadgets and hoping that the cycles are shorter (like the full moon cycle, 28 days!) between products redesigned and new releases. The iPhone and the subsequent refreshers pushed the boundaries and at the fringes (seemingly) very little has been added, but that is not entirely true. New gadget seekers have just become more impatient and excitable. Google glasses, Apple watches and so on, these are the innovators that both investors and consumers demand something wow.


I guess in some ways the company has been incredibly innovative and has released so many blockbusters that I am not surprised that the fans are looking for more. After all, we are not Oliver Twist, are we? Their products are expensive, but quality almost always trumps price, provided that it is also at the reach of most rich individuals. Some quick facts and figures, the latest iPhone, the 5, is the most successful iPhone to date. Yes. Even though you and I are looking out for the next one, this present one is the most successful. Sales of iPhones for the quarter were more than both the company and the analyst community expected, 31.2 million sold, and a further 600 thousand fewer in inventory. Popular across both developed and developing markets. Strong sales in Japan too, yowsers, up 66 percent year on year! Rising equity prices have meant people have felt richer and possibly buying products like Apple's. See, Abenomics works! For now, the long term implications, your guess is a good as mine.


iPad sales were disappointing, 3 percent down year over year to 14.6 million units for the quarter. In the earnings call, the CFO Peter Oppenheimer said that iPad's accounts for nearly 85 percent of tablet web usage in the US and Canada. What is quite interesting is that the company is noticing that many businesses are starting to adopt the iPad in business, with thousands bought across companies like Eli Lilly, Novartis, Cathay Life, Roche, and SAP. Those were the ones mentioned, remember that companies then customize these tablets with multiple applications. iPad sales to the US education department registered 1.1 million units, a record for the company in a quarter. The adoption of tablets by education is key for future sales, think of how the ecosystem will "lock" people in. Adoption of a new product is easy and exciting, the prospect of changing to another product is less exciting and there is almost always pushback. I know people who own a product and won't change, because the thought of doing that is as appealing as a department team building weekend at the dam.


Onto the Mac, the company saw sales fall 7 percent from the comparative quarter in 2012. Before you get your knickers in a knot, that would indicate that they stole market share, because industry wide sales were down 11 percent. The Mac is certainly a beautiful device, but I have up close and personal seen two folks shift from a Microsoft Windows environment to the Mac and I'll be honest, they have both had their problems!


iTunes sales for the quarter were a record 4.3 billion Dollars, with the best week ever for the company being the very last week in June, the end of the quarter. A 29 percent increase in sales, this is the "ecosystem" that the company refers to, once you have the products, you will start paying more and more for apps (you can never have too many of those) and buy more music, both old and new. Seriously, when last did you buy a compact disc? So out of total sales of 35.3 billion Dollars, iTunes still represents a small part of the overall business, but should continue to achieve these types of growth rates for the short term.


On those slightly higher sales the company posted quarterly profits of 6.9 billion Dollars. That translates to 7.47 Dollars worth of earnings (measured against the 9.32 in the corresponding quarter last year) per share, with a cash dividend of 3.05 Dollars a share. The dividend is unchanged, the total cash returned to shareholders during the quarter was a whopping 18.8 billion Dollars, in both the div and buybacks. Amazing. That is pretty huge. That is nearly 4 billion Dollars more than the Nokia market cap. In fact, if you add the Blackberry (formerly Research in Motion) market cap of 4.73 billion Dollars onto the Nokia market cap (14.91 billion) and minus the cash returned to Apple shareholders during the quarter, you get to 840 million Dollars. Or roughly 11 days worth of operating profits! So, don't compare the companies. That is like comparing Germany and Greece. No wait, people do those comparisons!


So what now? The stock over the last 52 weeks peaked at 705 Dollars and bottomed out at 385 Dollars. The stock in the aftermarket is trading 4 percent higher at 435.77 Dollars, a long way away from the highs. But on a forward multiple (expectations for the full year are just short of 39 Dollars) of only 11.15 times. And at that pre market price the dividend yield is 2.8 percent. Earnings are expected to increase around 10 percent next year and 12 percent the year after that. The cash pot is around 147 billion Dollars, that is cash and cash equivalents and both long term and short term marketable securities. That is roughly 36 percent of the market capitalisation. On an ex cash basis (just imagine if you could for a moment) they trade on an earnings multiple of close to six and a one third. That sounds crazy cheap still, notwithstanding that growth rates look pretty muted for the time being.


And I guess that is why the discount is applied. Because even if the market affords Apple a 12 multiple, 510 odd Dollars is where it could trade for next years earnings. A 15 times multiple afforded to the company would translate to a share price of 640 Dollars. The company needs excitement around new products to generate a multiple expansion of that magnitude, so that the growth trajectory can be restored. In the mean time, their cool factor remains, they remain in developed markets the product of choice, along with a few peers. The company needs to simply get their "coolness" back, but that will only happen with newer product developments, new blockbusters. Expectations are high for a new sized handset, tablet, a watch of sorts, a TV and so on. Whilst that continues to happen in the background, we will continue to recommend a buy on the stock. It is cheap.