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Tuesday, April 30, 2013

Market Thought... Sell in May?

The SP500 is riding high.


And despite a pretty crapy jobs number last month, the market has held up very well. At the moment, the market does not care. But when will it start caring?

Last year, despite a strong Q1 market performance, the "sell in May" rule of thumb rang true because economic data turned south. First it was the US jobs data, causing the Treasuries to collapse, which sparked the correction. Then the EU flared up, again. Even China gave us some crapy data.

Today, the SP500 is up about 8-9% since the beginning of the year.  The 10yr is at depressed levels. (Probably due to the weak jobs data and less then expected GDP.)


And China may have just broken their down trend.


This week will be interesting, as we will get more clarity from the this month's Employment Situation.

Scenario 1:

The jobs data comes inline or weak. Allowing the a treasury yields to that remain depressed. Earnings season passes, and the market has little economic incentive to push upward until data improves or next earnings season.  The market can chill sideways or start a correction.

Scenario 2:

The jobs data kicks ass. Leading to a treasury yield that can bottom, and break its short-term down trend. This could allow money flow into equities, and maintain upside.

Tuesday, April 23, 2013

unlocking value $aapl

Serious buyback and dividends, along with consistent time frame for value/institutional investors.  Exactly what Apple needed to get a multiple more in-line with the leadership role its maintains.
In conjunction with the expanded return of capital program, the Company plans to borrow and expects to announce more details about this in the near future.
Definitely a shift in direction for Apple, but a needed step to unlock value and place a floor on the stock.

Based on my rough calculations, and the above financial engineering, the stock should be trading (at minimum) toward 477. (More on this later.)

update:

Comparing Q3 2013 guidance vs last year's numbers:



est Q3 2013
Q3 2012

$35,500
$35,023
Revenue
37.0%
42.8%
GM %
$13,135
$14,994
Gross Margins
$3,850
$3,421
Operating Expenses
$9,285.00
$11,573.00
Operating Income
$350
$288
other income
$9,635.00
$11,861.00

26%
26%
tax rate
$7,129.90
$8,824.00

945.00
947.06
diluted shares
$7.54
$9.32
eps


Flat revenue growth, and due to the GM decline, income is projected to decline 19.4%.

This quarter saw a similar income decline, but revenue had 11% growth:



Q2 2013
Q2 2012

$43,603
$39,186
Revenue
37.5%
47.4%
GM %
$16,349
$18,564
Gross Margins
$3,791
$3,180
Operating Expenses
$12,558.00
$15,384
Operating Income
$347
$148
other income
$12,905.00
$15,532

26%
25%
tax rate
$9,547.00
$11,622

946.04
945
diluted shares
$10.09
$12.30
eps


The above is not a good situation for an instrument that investors predicated valuation based on earnings, or rather earnings-per-share.

There is little Apple can do with respect to Gross Margins. The iPad product and iTunes will keep gaining share in the overall revenue stream that will affect the overall GM. The current quarter did see a slight decline in ASP for the iPhone to $613, and did not pick up a reason for why that was the case. (But I was expecting a decline due to the increase new financing push.)

Apple can, and has decided to, control the share count. They have given investors a very detailed look at their intentions: the capability of repurchasing $60B by the end of 2015. This is what a potential $20Billion a year looks like.




stock price
buy back
shares
2013
$400
$20,000,000,000
50,000,000
2014
$400
$20,000,000,000
50,000,000
2015
$400
$20,000,000,000
50,000,000


$60,000,000,000
150,000,000


If Apple's stock stays at 400, Apple can theoretically repurchase 150M share. Thats about 15% of the company, and bring the share count to 796M.

For the sake of this exercise, lets ignore the growth of iPad, the consistency and growth of the iPhone, the moat of iTunes/iCloud, the consistency of the Mac, the growth of iTunes via revenue/earnings and the potential of new products and new earnings streams.  The below exercise assumes the above reduction in shares from the above, and flat income from 2013 to 2015. (The income estimate uses Q1, Q2 numbers with Q3 Apple guidance and assumes a 10% decline in Q4 income.)




yearly earnings
share count
reduction in shares
potential eps
2013
$37,154
946.04
896.04
$41.46
2014
$37,154
896.04
846.04
$43.92
2015
$37,154
846.04
796.04
$46.67


As a baseline, the effect on EPS is pretty clear. But there is also flexibility within their plan facilitating optimal repurchases.

Where the stock goes from here is on Apple and the institutions that follow the buy back.  But $20 billion a year focused on repurchases is a lot of demand for one stock.




Saturday, April 20, 2013

$aapl discount

During Apple's fiscal Q1, their projections were no longer a straight forward EPS guidance. The projections became a more detailed rundown of Revenue, Gross Margins (GM) and Costs.


Q2 2013 estimates


Revenue
$41,000
$43,000
GM %
37.5%
38.5%
Gross Margins
$15,375
$16,555
Operating Expenses
$3,900
$3,800
Operating Income
$11,475.00
$12,755.00
other income
$350
$350

$11,825.00
$13,105.00
tax rate
26%
26%

$8,750.50
$9,697.70
diluted shares
945.00
945.00
eps
$9.26
$10.26


Apple has always had a history of under-promising and over-delivering.  This time last year, the under-promising and over-delivering was also combined with a bit of industry favor, allowing for component costs to drastically decline. Fiscal Q1 2012 saw a GM of 44.7, Fiscal Q2 saw a GM of 47. These are huge GMs!

Q1 2013 saw a reversion to more normal GM levels. Despite the GM decline, Apple maintained its trailing EPS, thanks to increased sales. The trailing EPS was replaced a 13.87 (from Q1 2012), with 13.81 (from Q1 2013). This allowed for a flat trailing yr-over-yr EPS growth.  (Trailing EPS of 44.16 vs 44.1)

During the Q1 2013 report, what spooked investors was Apple's insistence of realistic guidance. Based on this thesis and the numbers above, trailing EPS is projected to decline by about $2. Q2 2012 saw an eps of 12.30 with GM of 47. Huge! Assuming Apple meets their high-end estimates (and the macro environment suggests they will), Apple's trailing yr-yr EPS will be about 42.06. 

The estimated trailing EPS is projected to decline by 4.6% entering fiscal Q2.

Because of these higher GMs last year, Apple's trailing yearly EPS is flat.  Unfortunately, the media and much of wall street have been misrepresenting this very straight forward concept with the most vociferous amount of bullshit I have ever read and heard.  Ranging from a broken company to a company no longer innovating. All bullshit.

The loop-of-negativty became so pronounced that Apple is now trading with a trailing multiple of 8.85. This factors in cash. Basically, the street is pricing the iPad, iPhone, Mac and iTunes business with a trailing price-to-earnings multiple of about 5, as cash is excluded.  All product lines leaders in their respective space, highly profitable and growing, and the street has given them a single digit multiple.  Makes complete sense to wall street analysts, and hyperboles of negativity.

Over the last few years, Apple's trailing PE had some sizable swings even as EPS kept growing. (data from wolframalph.com)


The previous low was during the great recession. Then as the company became larger, and profit pored in, the trailing PE never exceeded 23. The larger the company became, the more consolidated the trailing PE became.  Over the last two years trading as one of the largest companies in the world, Apple's average trailing multiple is about 13.7.

As the street started to embrace the flat yr-yr EPS growth, the trailing PE stayed toward the previous low-end, 11-12.

After the fiscal Q1 2013 report, Apple's trailing PE has declined from 12 to 8.85. This is a decline of 26.25%.  Above, we established that the yr-over-yr EPS for Apple is projected to decline by 4.6%, and because of this, the street allowed the worth of the company to decline by 26%.

If we assume the market to be efficient, Apple should have a trailing eps 22% lower then the current projections.  Basically the market is expecting Apple to have a trailing eps around $33.6. (33.6x12 = 403 stock price)

Over the past few quarters, prior to Q1 2013, Apple was unable to meet analyst expectations.  Analysts got caught up with the higher margins of last year, and adjusted their projects to fit unrealistic criteria. And despite record growth and sales, Apple kept disappointing bullshit expectations.  Apple has now crushed those expectations, and analysts are basically lock-step with Apple's expectations. (In fact, as of this mornings, analyst expectations are slightly below Apple's high-end by 19 cents.)

The hyperbole negatives do not stop at this coming quarter.  Analysts are also taking down June quarter estimates as well. As of this morning, the estimates for June are 9.08. If we complete the same exercise as above, a projected trailing EPS would be 41.82 (from 42.06, remove 9.32 and add 9.08).

The lowered expectations are still projecting a relatively flat trailing EPS growth, and the above argument of discount still applies.

Going forward, Apple's gross margins will remain somewhat more depressed.  Not because the ASP of iphone will collapse. (The average selling price of the iphone has been consistent for 3-4 years. And given the fact that Verizon's numbers indicate its currently the only smartphone growing in the US, this should not be changing anytime soon.)  As iTunes become a larger part of Apple's business, this will effect margins. (iTunes has a wide mix of very high-margin software/services sales and very very low-margin content sales.) 

I completely disagree with the current discount the market is giving AAPL, and my portfolio is currently the victim.

Friday, April 19, 2013

$goog gets a free pass with margin compression

So, over the past few months we saw:

1. $amzn miss on earnings and revenue, while showing a deceleration in revenue growth, but the stock remains elevated.

2. $goog has a fairly sizable margin compression, and the stock is allowed to remain elevated.

But the stock of the company that is literally guiding the entire evolution of computing forward, along with the copy cat approach from AMZN and GOOG is rewarded with a severely depressed multiple.

Sometimes, I fucking hate Wall Street.

People who 'think-they-know' can argue until they are blue in the face as to why the above is taking place. Whatever the reason, I will counter with why the reason is bullshit.

$ibm... hmmm

Upon reading the press release I was very surprised at the relative weakness given the very good last quarter.  I thought there would be some follow through into this quarter.  But the Infosys warning had merited more caution into the IBM earnings.

The press release alone gets an "ouch" rating, and it smelled like left-over weakness from Infosys. But after listening to the conference call, the quarter was not as bad as the PR portrays.

There were three concerns that caused the miss.

1. Leadership changes in China caused a shift in business dynamic

2. Two deals that did not close before the quarter closed. (The call made many references to these deals. If they were closed w/in the quarter, there would not have been a miss.)

3. The yen decline effected about 7-10 cents eps because services revenue could not be hedged. (This was also an issue in Q4 2012, but that did not prevent IBM from crushing it.)

Conditions 1 and 3 may have caused management to take a more cautious look at expectations, and not raise the low-end eps guidance of $16.70.

If these three concerns were mitigated, IBM would have been great. But they did happen, and IBM didn't beat. These deals should be seen in Q2, and not sure when 1 and 3 would be resolved. (But I am not too concerned about the yen currency issue. If IBM executes, the currency conversion will not be an issue.)

On the plus side, IBM may look to unload their x\86 server business. (Lenovo says its in early talks. If its anything like their PC deal, it will work out well for both parties.)

If after hours action holds up, tomorrow will see IBM see a sizable decline, and appear to be a broken daily chart.


From a weekly perspective, the SMA trend may hold up if the high 190s hold.


Similar with the monthly data.


IBM's revenue and earnings (and eps) growth appear to be very much intact, and with continuous buybacks (of which $6 billion still remains), the down side may be limited to the 190s. A stock price of 195 would suggest a trailing multiple of 13.5. 

Over the last two years, IBM's multiple has slowly been expanding that's to the steadily increasing eps and continuous financial engineering. Given that the conditions are still intact, the slowly expanding multiple should be as well. This should mean IBM's low-end trailing multiple to be near mid 13.  A position after hours has almost allowed to happen. 


Thursday, April 18, 2013

add to the list of 'good' $aapl

Verizon's yr over yr growth in iPhone was 25%. (Q1 2012 sold 3.2M, Q1 2013 sold 4M.)

Again, that's a 25% yr-over-yr growth.

Instead of feeling good about these numbers, I feel like I am in the twilight zone as major publications are focusing on the quarter-to-quarter decline. Which is (and has always been) an unreasonable comparison given the new product launch and holiday season during the last quarter.

Oh, by-the-way, android yr-to-yr growth at Verizon was... 3%. Yup, 3.2%!!

Twilight Zone.

$aapl chatter during the quarter

There is the good, the bad and the wtf wild cards.

the good

1. Mac sales improved from the manufacturing-induced hiccup. Apple's fiscal Q1 led a to a sizable decline in Mac sales. Q2 looks to have made up those sales. (31% yr-yr increase; Gartner estimates a +7% growth; (although IDC estimates a decline of 7%)

2. Increased sales w/in emerging markets due to a greater focus. India saw a noticeable rise in sales. Then, after the increased sales, Apple implemented creative financing to facilitate higher sales.

3. ComScore OEM and Platform share increased for Apple over a three month ave. ending Feb.

4. iOS mobile engagement keeps growing, despite Android market share.

5. Smartphone growth will only continue. (here is another study saying the same in developed and developing countries)

6. The desire for the iPad still dominates.

7. iPads simply dominate usage.

8. Apple's Google-esque web-services improved.  (Not to mention Apple is tops the charts as a media based cloud provider.)

1-7 should bold well for earnings. 4-8 should imply continued success for the June quarter.


the bad

1. Kantar survey showed iOS lost some ground three months ending Feb.

2. Due to new financing (via the emerging markets and some US carriers) iPhone ASP may decline, somewhat. (Over the last 4 years, ASP for iPhone has been very stable near mid 600.) Not sure how this will effect eps.

3. Cirrus Logic announced $20M of their inventory will be a write-off from a "large costumer" as the costumer transitioned to a new product.  Apple is their "large costumer". The below quote is directly from Cirrus' latest 10Q:
We had one end customer, Apple Inc., who purchased through multiple contract manufacturers and represented approximately 91 percent and 70 percent of the Company’s total sales for the third quarter of fiscal years 2013 and 2012, respectively.  This same customer represented approximately 82 percent and 62 percent of the Company’s total sales for the first nine months of fiscal years 2013 and 2012, respectively.
Few potential conclusions: 1. the forecast from Apple were overstated; 2. Cirrus over produced to ensure supply would be met (to prevent a 2011 production issue repeat); 3. the contract manufacturers over stated forecast. (Given Apple's ability to quickly adjust the supply chain to demand, along with the items mentioned above, I am leaning toward #2.)

wtf

1. China's blatant media blitz against western companies. (The manipulation was known early, and still, Apple officially apologized fairly quickly. Not sure if this hurt sales.)

2. Almost every analyst lowered expectations this quarter. (Literally, there was one or two a day for the last couple of weeks.  Facilitating the current discount and negativity.)

The biggest concern is that Apple will not meet analyst expectations going into the June quarter.  As of today, those expectations are 39.62B for Revenue and 9.28 eps.

The 'wtf' wild cards, and today's Cirrus news, has obviously discounted the stock. The negativity in Apple is so pervasive if Apple can simply meet expectations the market will not need to discount an eps decline of 30-35%.  A re-assurance of EPS stability may lead to a multiple of at least 12. (A reversion to the previous low-end PE.)

Apple is very very oversold. From long-term monthly chart, the last time Apple was this oversold it was during the great recession.



If AAPL can't, at the very least, meet expectations then the negative momentum (along with another cycle of negative analyst commentary) may take it for another 100 points.  Rational valuation of product-lines be damned.

(Times like this I wish I wasn't so rational to the fundamentals.)

Tuesday, April 16, 2013

$GOOG likes open so much that Glass Apps are NOT open

I really like and appreciate Google, but their message is horribly inconsistent and makes them look like douches.

Friday, April 12, 2013

T-Mobile eases as $vz tightens

Considering the LTE service on Verizon has been spotty recently, looks like VZ is trying to choke hold their costumers for a few extra months, instead of compete.

$bac not about earnings

The play on BAC is about reversion to book value.

The play on the healthier banks (jpm, gs, wfc) are about earnings.

Thursday, April 11, 2013

Fail to understand the bigboys... $aapl

The recent IDC and Gartner PC number were just awful for the PC complex. The numbers were just crap.

The post PC computing evolution is here, and PC shipment trends are not going to change.

The companies too reliant on the PC deserve a lower, much lower, valuation vs the companies positioned to benefit from this evolution.

On a forward basis, the pc duopoly (intc and msft) have a comparative valuation to the post-PC poster-boy company (aapl):

MSFT = 9.21
INTC = 10.53
AAPL = 8.80

First, the shipment reports suggest the forward earnings of msft and intc are very suspect.

Second, based on the trends, money flow via the big boys should move away from the weak players and into the well positioned player. (Especially since msft and intc attempts at the post PC world have thus far failed.)

As the market stands today. The market, aka bigboy money, is currently saying msft and intel are in a better future position than AAPL.

Sunday, April 7, 2013

Market Thought... the pause

The Employment Situation number sucked.  From an estimated 193,000 an actual number of 88,000 jobs created. Can't put lipstick on a pig.  The crappy jobs number (including the weak jobless claims for the week) caused the 10yr yield to collapse.


Over the past few days I have been searching to an outlier, like Hurricane Sandy that caused an unusual spike in jobless claims or a drop in employment. The best I could find was an explanation of "seasonality". In other words, a bullshit reason.  The only reasonable explanation could be the underlining effects of the sequester.

My market thesis is predicated with job's data as a leading indicator towards US economic growth. Although Friday's number was weak, there are a few macro conditions to keep in mind:

1. the weak jobs number was still a growing number

2. SP500 earnings are still growing

3. no anticipation of US recession

4. few potential "market-shocks" left (Although any idiot bureaucrat/politician can always say something stupid, and the markets can decline.)

The central banks across the world are trying hard to prevent shocks and facilitate growth.  Before they were doing this (from 2008-2012) the SP500 was trading below the historic norm of trailing PE (15).  The markets kept trading at a discount even during economic growth because of the potential EU shocks.

My thesis for the market is calling for a 'new dynamic', where the SP500 will begin to trade between 15-17.  Because of the above, I still believe this dynamic is still in play. But with the collapse of the treasuries, the markets will be hard pressed to push toward a trailing PE near 16, let alone 17.

A weak signal to the US economy should keep the market near a trailing multiple of around 15.

Now that Q1 is completed, the anticipated trailing EPS for the SP500 is 100-101.  With a trailing PE of 15, the market could hover around (100x15) 1500.

Structurally, the supports for the SP500 are highlighted below:

On Friday, the SP500 bounced off the initial SMA support. Next stop is the 62SMA on the daily.

The longer term trends suggest we can pause around the monthly support via the triple top break out, near low 1500.




Thursday, April 4, 2013

$FB mobile, f*@k yeah

(Curious as to when Mark Zuckerberg will let go of the hoody?)

What I found to be the most interesting part of the Home demo today was how fluid the software layer worked. Looked pretty good. But before I go into Home, first some facts on the mobile Ad front.

A taste of US mobile Ad revenues. Nice growth.


Mobile Newsfeed Ads highlighted below suggest a higher conversion, but still a lower cost-per-click compared to the PC.


The CPC should begin to rise (probably more strongly than anticipated) because of the sheer time Facebook users spend on the App, Facebook's ability to target their Ads (with good ROI results) and the continued strong adoption of mobile.


All-in-all, the mobile situation (not including Home) seems on the up and up. Its a situation that does not merit a negative trend.


The introduction of Home, and its potential, is a bonus.  Home looks like a marvel in software capability and UI. Solidifying the thesis that Facebook "gets" mobile. (Any analyst or guru who say otherwise is truly not worthy of their position.)

Home will obviously not be for everyone. (Its not for me. I just don't like all my actions being tracked, whether it be by Google or Facebook. This is why iOS is for me.) But Home will be for a lot of Facebook users.  Facebook has about 600-700 million active mobile users.  Of those users, if only 10% are power users (who really don't care about their privacy), and have Android (version that is capable of Home) thats 60-70 million users of Home.

That's 60-70 million users to extract graph information, and provide Ads. (I suspect ads on Home will be worth a high premium.) With this hijacking on Android, Facebook will be in an awesome position to  push Graph search and truly unleash its potential as a local search engine. (As per comScore, Facebook dominates local search on social. No link to this, just a big infograph that is too cluttered with other info, so I will not include it.)

Good stuff Facebook. Today you deserve a fuck-yeah.

Wednesday, April 3, 2013

iOS engagement jumps and still dominates $aapl

iOS user interface(UI) is in such dire straits that mobile browsing jumped, and still dominates. (As per NetApplications)

See, the problem Wall Street has is that its filled with a shit load of idiots. All these "idiots" take the idea of others pawn it off as their own and gauge the thesis on the momentum of the stock. (This is why negative and positive cycles emerge.)

In Apple's case, the momentum requires a thesis. And since there are influencers (usually the very techie early adopters who want new things yesterday) say UI needs to change. So the idiots latch to the thesis, and call Apple stale.

Mean while, as the data shows, Apple is far from stale. In fact, their reorg to refine their UI is ahead of the curve. (If it wasnt, the engagement numbers would not be spiking. They would be flat-to-declining.)

Then the talking heads on CNBC latch on to the bullshit sentiment, and literally spew shit.



Market Thought... leaders cracking?

With the market continuing to rise, there was another mixed signal that merit attention.  Some market leaders have been cracking.



The 10 treasury yield is still depressed. If the employment report continues to be solid, that should lead to a treasuries to sell off, and drive money into equities. But if the employment number is not-so-good, the above would be a prelude to pause w/in the equity markets as leadership is dropping.

The extent of any market pause should be minimal. Not expecting a decline greater than 3%. 

Monday, April 1, 2013

Bullshit analyst of the day Glen Yeung

They replaced Mark Mahaney with a tool. His view on Chinese sales are completely asinine.

How the fuck are people like this even allowed to have such a platform to speak, and get paid well for it no less.