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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

GM %
Gross Margins
Operating Expenses
Operating Income
other income

tax rate

diluted shares

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

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.

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