Apple Q4 – Bond scenario

If Apple was a bond, I would be buying every scrap I could get my hands on.

• Apple reported disappointing results as the woes that have plagued the rest of the tech sector are coming home to roost.
• Q1 revenues and EPS were $54.54bn / $13.81 compared to estimates of $54.88bn / $13.53.
• Cash balance was reports at a staggering $137bn
• Unit shipments
  • iPhone – 47.8m units shipped compared to estimate of 47.8m (43.1m-53m)
  • iPad – 22.9m compared to estimates of 22.4m (18.4m-26m)
  • iPod – 12.7m units shipped compared to estimates of 11.4m (9.6m-13.4m)
  • Mac  – 4.1m units shipped compared to estimates of 5.1m (4.8m – 5.4m)
• Guidance
  • Q2 revenues will be $41bn-$43bn compared to estimates of $45.81bn ($38.76bn-$50.12bn).
  • Q2 Gross margins are expected to be 37.5%-38.5% compared to estimates of 40.6% (37.8% – 43.5%).
  • Apple has historically guided meaningfully lower than what it thinks it can really achieve.
  • However, from now on Apple will guide towards what it believes it can actually achieve meaning that there will be no more deliberate low balling of guidance.
  • This basically means that everyone is likely to get the knives out and cut their numbers to the guided range.
• The adjustment of revenues and gross margins should translate into a consensus estimate cut of around 15% when it comes to EPS.
• This would give EPS for fiscal year 2013 of around $40.
• With a 10% hit from last nights close this puts the shares on 11.6x 2013 PER.
• If I take the $137bn of cash out of the equation (which is $145 per share) then the shares will be trading on 8.0x 2013 PER when the stock opens this morning.
• When a company gets to be this big there is no way it can grow at a breakneck pace.
• So let us assume that it never grows again and spends the rest of its life innovating just to stay where it is.
• This would mean continuing the huge investments in innovation just to keep revenues, market share and margins where they are today.
• This would mean a company generating around $80bn in cash from operations each year.
• If I hold the shares now, Apple will have generated the full value of my investment within 4 years.
• If Apple was a bond and free cash flow the coupon, it would be the most exciting fixed income investment I have ever seen.
• Of course, one takes the risk that revenues and margins fall anyway and that one never gets one’s paws on the huge cash pile but with a 25% yield, that’s a risk worth taking.
• It is much too late to sell and while everyone else is heading for the door, I am increasingly looking in the other direction.