Posts Tagged 'AAPL'

APPLE (AAPL): From Innovation To Sustenance

At the time of Steve Jobs death, we wondered how the company would survive, finding solace, but not answers, in a rising stock price. We’re back to wondering.

First, let’s go back in time to a different era when the business was fun and huge compensation packages in return for mediocre efforts were the norm; when institutional investors’ commission budgets had a direct correlation to the ability of their sell-side coverage to navigate around a wine list or was dependent upon how many fistfuls of singles they could carry in their briefcases for a night out on the town; and when CEO’s had a period of adulation that extended beyond that of the latest Billboard #1 single. It was the early 1990’s and I was an institutional salesperson at Salomon Brothers. I had joined Sollie after the Treasury bid rigging scandal, figuring that the bar was set so low that it would be difficult to not stand out because, for the most part, the other senior salespeople who didn’t leave for big contracts at other firms were either lazy or smart enough to know that they were held in higher regard by Sollie management than their skill sets would allow at other firms. I, however, was a research salesperson, not a maitre’d, so I only entertained friends, not clients, because I chose to actually make my living through stock picking prowess. And in choosing this path, I loved companies that were dominant and got there through disruptive technology.

But for all the differences between these two eras of then and now (I never thought I would be in the business long enough to reference different eras but that’s a different discussion), there are a number of similarities and the changing of the guard in innovation is one of them. In the eighties Apple, after much fanfare as the innovator of a new technology for personal computing fell on hard times, exacerbated by the departure of Steve Jobs. In the process it became a single digit midget and instituted a dividend, of all things, in the hopes of drawing greater interest to its stock price. Innovation returned with the return of Jobs although it took a while for a new product cycle to revive the company’s prospects and share price.

Fast forward a few years to when Michael Dell was a rock star, having introduced one of the first virtual business models, essentially the front-runner to the way Amazon does business today. I spent some time with Dell and was duly impressed, marveling at how his real time manufacturing and custom build of PCs drove his stock price to a premium versus the other manufacturers such as Compaq, although its multiple never reached the height lofty heights of Apple’s during the last few years. In fact, even with the sell-off in AAPL, it still enjoys a 50% premium to Dell, even with a supposed bid on the table.

Some of these tech companies were so innovative, powerful, and successful that no one envisioned how far they would eventually fall. Remember when IBM was the niftiest of the nifty 50, only to whither on the vine as mainframe growth slowed and Dell commoditized their PC margins during the early ’90’s. Ultimately IBM came back into favor but never achieved haloed valuation status again.

And there’s Yahoo – the former search innovator struggling to survive; AOL, once most dominant, the only people now using their email service are those of such an advanced age that the arthritis in their hands has prevented them from sending emails for the last 10 years. Sony – the Walkman, the first really portable music player; Motorola – the innovator of the RAZR whose dominance commandeered virtually all the selling space for cell phones, its peak price multiples of what the iPhone retails at.

Then there is Eastman Kodak, patents once so dominant and a franchise once so powerful that not only did it have its own pavilion at the World’s Fair but was also the target of anti-trust lawsuits. Now the only ones making money from EK are bankruptcy lawyers. Add Polaroid, Hewlett Packard, Xerox and even GM and Ford.

And, of course, there’s the Blackberry, which enjoyed a far more dominant position in corporate America than the iPhone ever has. Such a ubiquitous device, its addictive powers so strong that the term “Crackberry” was coined and Blackberry etiquette rules for family and businesses came into being. I recall far more late night TV routines on Crackberry addicts than I do on those tethered to an iPhone. RIMM is yet another technology innovator struggling to survive.

Fast forward to the present, back to Apple. It has had a great run as a stock and a company based upon the iPod, the iPhone and iPad. The desktops and laptops are high margin, high cost products that have struggled to gain significant penetration into corporations whereas Apple’s personal devices have been valued as much for their cutting edge technology as their cool factor. All aspects of the company experience are positive – from the stock price to the commercials, to the Steve Jobs impact on tech company CEO sartorial preferences.

Thus the seminal questions: can Apple do what no other company has ever done by continuing to be an innovation leader without ultimately ceding their edge to others? Can it continue to command premium pricing for its products when others are putting forth better technology at lower price points? Has the coolness factor taken too much of a hit, owing to a stock about which cocktail party conversation has become “I sold my stock at $700 and bought FB at $18” instead of “I bought more AAPL at $600?”

I had an iPad 2 and as I have mentioned before, gave it to my daughter (well, sold it to her but have yet to collect. She’s like the govt., kicking the obligation down the road.) When I went to buy an iPad 3, the salesman told me there was nothing really new. In fact, away from size, the mini has even regressed from a technology perspective. There’s not too much new technology in the iPhone 5 either and the Galaxy is more advanced and cheaper. I actually believe the coolness factor of the iPhone has, until now, driven sales more than innovation and ease of use but as saturation has mitigated the power of first adopters and Apple sycophants run into budget constraints, price is beginning to matter, particularly when functionality is also important.

The telcos have wised up, realizing that they in fact are the true king makers and can drive product acceptance as long as they have something to work with in terms of price and technology. Samsung and Nokia give them that and China mobile gets it, drawing a hard line with Apple.

So where are we? Apple needs a big quarter and great guidance for the next quarter, margins and unit sales never being more important. But mostly, it needs new, truly innovative, technologically advanced products. I don’t know if it is coming or not, but I do see growth slowing and this has resulted in a P/E that has continued to contract away from that of globally branded, high growth companies, to a typical retail or highly cyclical company. At least for now, with AAPL being a show me stock, I’m not sure this is wrong. I am concerned, however, about the possibility of lower price point products because this leads to the oft spoken and seldom effective strategy summarized by “we’ll make it up on volume.” That strategy often leads to slower growth and weaker earnings. Part of the appeal of Apple products has been its exclusivity and a large part of the appeal of its stock has been the fat margins.

Bottom Line: (I know – long overdue): In a rising market, I believe that Apple will be a decent stock. Too much cash to ignore; too much innovation that they can buy. The brand is not damaged in the least, which is a critical consideration. Perhaps still too widely owned, it has been attractive to both value and growth investors for quite some time so I struggle with identifying the marginal or new buyer. I am also worried about the current quarter but perhaps that is discounted in the shares although should it miss 3 quarters in a row investors may wait to get on board. Throughout the entire cycle, Apple has taken advantage of the consumer through premium pricing. Now, as a prospective shareholder, the shoe is on the other foot so I’m looking for a bigger discount to the share price. I do stand willing to pay up if the cool factor comes back – along with new products. In fact, the worst thing that can be said about Apple is that it’s a tech company. Altria, a declining business if there ever was one with no innovation and a paltry growth rate, sells at a significant premium to AAPL owing to a large dividend. It’s a strange world.

Here’s what bestselling author Todd Bucholz has to say about my new novel – UNHEDGED:

 UNHEDGED will take you hostage–sweeping you into a dangerous world where the

quest for big money dominates and good people struggle to escape. You won’t break free until you get to the last page.”

http://www.amazon.com/Unhedged-Novel-About-Killing-Market/dp/0786754745/ref=sr_1_1?s=books&ie=UTF8&qid=1358202333&sr=1-1&keywords=unhedged

 

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Damn! I know That Invite Was Here Somewhere

merci, ben

danke, ben

謝謝你,本

Gracias, Ben

ベン、ありがとうございました

σας ευχαριστώ, ben

شكرا لكم، بن

 

The world over, in every language, from French to Mandarin to Greek to Arabic, the same words are being spoken with incredible enthusiasm, often in a voice that cracks with unbridled emotion and gratitude.  They are 3 simple words: Thank you, Ben.  But there are always the forgotten ones, those who declined the invite. Now, they lay in their beds, pulling their pillows tightly over their heads, cursing the loud music and laughter coming from next door as they hold firm to their righteous beliefs that such frivolity does no one any good, it’s too late, it’s too dangerous, it’s sacrilege, it’s too Keynesian.  Good luck with handling the outflows.

 

Frankly, I don’t care if Keynes is throwing the party, or Bernanke or Draghi.  All I want is to have a good time.  I don’t care if the host pays the caterer after I leave or doesn’t – ain’t my problem, ain’t my job.  And cleaning up – that ain’t my job either, I’ll be long gone before the mess has to be cleaned up.

 

I was in a similar situation once.  I was in college, working weekends at a job that started at 6 AM so I decided to go to bed early. It wasn’t my usual M.O. but I had peaked earlier in the week and was exhausted. With the party in the dorm just getting going, I found myself tossing and turning and cursing out those morons next door.  Finally, I threw off the covers and threw on the jeans and joined in.  Someone else would have to throw the towels in the washer at the tennis club (or I would just fold the dirty ones – who would know? They sweat like pigs anyway).

 

So the bears have a choice: let common sense and a strong belief that what Bernanke is doing is wrong and miss the party or say “what the hell” and join in. If they’re smart, they took the latter route and realized that it’s not their job to debate economic policy and what the long term impact of QE’s will be; it’s their job to make money and when the world over is easing – except for the Chinese who’s contribution is to pay lip service to it – you have to lift the glass.

 

Thus the only question is how much of a good time is too much?  Can I throw back that lost jelly shot or is it time to hail a cab and head home.  For me, my margin of error is sometime before Rosie O’Donnell starts looking like Kate Upton and when I start talking about how, at 5’8” inches (maybe), I used to be able to dunk a basketball. But having been around long enough, I’m not going to get greedy.  I’ll be back to shorting materials soon but for now I drink the castor oil and am long some of the worst positioned companies I could find: steel and iron ore. I do feel guilty going to the dark side but these are only trades.

 

My favorite quote of the day comes from Home Depot as they announce the closure of 7 big boxes in China:

 

“China is a do-it-for-me market, not a do-it-yourself market, so we have to adjust,” the company said, although the country’s slowing economy is also not helping.

 

Are these really the same people that are going to take over the world?  They can’t even find their Chosen One although I had heard he was spotted in Macau driving a Ferrari with a Pamela Anderson look-alike (circa 1998) in the passenger seat while looking for a role as an extra on The Hangover III.

Paris Hilton, Europe and China, Energy – Natural Gas: the new HK and CHK, AAPL

The ratings agencies continue to be as effective as Paris Hilton at a spelling bee as seen by Moody’s latest action of putting some banks under review.   The real troubled period for the U.S. banks has, for the most part passed, so near as I can tell the ratings agencies are pressing their shorts.  To paraphrase the anti-motto of the UFT: “Those that analyze, analyze and those that can’t, work for the ratings agencies.”  Throughout my career, I never recall anyone resigning from a fund or investment bank to go on to the greener passages of the ratings agencies.  “I’ve finally made it; my dreams have come true.  I’ve landed this incredible position at S&P.  Sure I will have to get a night job to make up for the lower pay and have to adjust to working in a cubicle the size of a bathroom stall – it’s not easy balancing my family pictures on a roll of toilet paper – but I have my nights free and significantly less pressure since there is no penalty for being late or wrong.”  As a comedian feels about a significantly overweight individual with a very bad toupee, we should all be indebted to the ratings agencies for providing us with such easy fodder.

 

China continues to be a primary concern for me. I noted yesterday the downside of China’s check in the mail commitment to assist in the European bailout as a sign that things are worse for China’s economy than the market has believed.  I postulated the Chinese are seeing more than passing weakness in their economy as a derivative of the weakness in Europe, their largest trading partner.  And today we see the rationale for China’s magnanimous and proactive statement of financial support.  Foreign investment in China is declining and is at the lowest level since 2009, the bottom of the last recession.  Earlier in the week, the city of Wuhu terminated their policy of providing subsidies to home buyers at the behest of the central government, signaling to me that they are more concerned with a property bubble and inflation than they are with a slowing economy, recognizing what Greenspan failed to see.  China bulls remain steadfast in their conviction of a soft landing, the strategy underlying this belief is that the communists will deploy their massive (but fading) foreign reserves in support of Ferrari driving real estate developers, overextended municipal governments (40% of revenues from property sales and subsequent deals to develop), shadow financiers and the occasional overextended homeowner.  Now add in profligate European sovereigns and we have the first “born again” communist country.  Somehow, I believe this will not be the case, given their very long term view; they will let these folks all suffer their sins to a large extent and not be as generous as a Greek politician who has had way too many shots of ouzo.

 

However, with Europe estimated to account for approximately 18% of their trade, look for  increasing comments professing support.  In fact, China may decide to tender for the EU rather than picking off their assets piecemeal.

 

Greece will ultimately default even though the troika may put them on an allowance rather than providing a lump sum.  The installment plan buys the troika more time to put together a plan to ring fence the other over extended sovereigns.   A Grecian default, not to be confused with allowing the gray to grow out from your scalp, would result in a knee jerk reaction lower in the markets and then a move higher as the credit markets realize that the EU is finally ready to enforce fiscal discipline.   This would actually cause a major rally in the Euro but for now I am staying short, having rebuilt the position over the last week on the belief that all the good news was out and as crowded as the short trade was, the long trade was now the more popular investment.

 

I’m still in the camp of consolidation with somewhat higher equity exposure in lower beta, value stocks and short positions in commodities such as coal, steel and copper.    Perhaps we get a reaction move lower but with the massive liquidity in global markets and more due on 2/29 from the new and kinder “ECB”, bonds are the riskier asset and stocks more attractive.

 

And  one more thing, Apple.  I get that the stock action has accounted for a large percentage of the underlying averages but two things: the story is far from over and the market can move independently from the shares of AAPL.

 

Natural gas.  Looks like the lows may have been put in.  At the end of the day, we’re capitalists and the energy industry in this country is still one of the best managed sectors we have.  While the glut is not over, and hopefully the government recognizes the wisdom of incenting greater usage of natural gas as a replacement for crude, the shut ins are encouraging.  Of course, while the warm weather has increased “inventory” levels of natural gas and coal, these will be depleted at some point and are arguably reflected in the price of the equities to a large extent.  We have two CEO’s in energy that actually do what they say they will do: Floyd Wilson and Aubrey McClendon.  Floyd has been a major creator of wealth as he built and sold, to the benefit of shareholders, 3 companies. He is now in the process of doing it again with Halcon Resources (HK, a ticker in the Hall of Fame for its association with Petrohawk, has had its jersey unretired).  He makes no bones about it: I will build it and exit.  The $550 million he brought to the party underscores his commitment.  As to CHK, admittedly the debt levels, not so onerous in a different environment, are squarely in Aubrey’s sights and he has surprised the Street yet again by targeting higher levels of asset sales and further pay down of debt.  Underlying this, and somewhat unnoticed, is the transformation of a company too dependent upon natural gas (they have also announced they will shut in some gas)  to one with a stronger focus on liquids.  This is what will also drive the new HK – a focus on liquids as opposed to Petrohawk’s dry gas model.  Top CEOs understand and respond to changing market dynamics.

 

Disclosure: I am long HK, CHK, EUO and short AAPL puts.

The European Sucker Play; US Stock Bargains; Apple

The most important real near term news coming out of Europe will be the ECB rate decision tomorrow. Trichet is bidding adieu at the end of October and this is his last opportunity to reverse the prior rate hike. Does he head to Hotel du Cap admitting a mistake or stick to his guns and allow Mario Draghi to cut, although he has previously said it isn’t necessary. Perhaps the economic releases this morning may spur the correct decision, in conjunction with recent declines in commodity prices. Eurozone services PMI fell to 48.8 from 51.5 according to Markit survey, first month since August 2009 below 50. In other releases, Germany was sub 50 as well, France barely above 50, Italy and Spain continue below 50 at very low levels of 45 but they are already in recession. My guess is that France and Germany experience contractions in economic growth as well.

More importantly, does the troika come up with a major bail out prior to Trichet leaving and before Draghi takes over. Not sure how many EU members want an Italian telling them they have to pony up vast sums to save Italy. Fox guarding the chicken coop? Not quite but this will ratchet up the opposition or lengthen the time to cure if Trichet doesn’t act first.

The Financial Times had the story that wasn’t a story. The following 2 lines squeezed the shorts, lit a fire under those with light exposure and gave us all something to talk about.

“There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Olli Rehn, European commissioner for economic affairs, told the Financial Times. “There is a sense of urgency among ministers and we need to move on.”

“Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” Mr Rehn said. “This should be regarded as an integral part of the EU’s comprehensive strategy to restore confidence and overcome the crisis.…”

Rehn’s statement was nothing more than an attempt to put a temporary halt to the market crisis, an admirable goal, but hopefully there is ultimately more substance behind it. With the public division in the EU about solutions, I fear any resolution will be a long time in coming. Even the ESFS is flawed with Italy and Spain committing to guarantees of 79 billion Euros and 52 billion Euros, respectively. And, of course, Greece has agreed to be on the hook for 12 billion. I feel better now.

So the market basically did a hosanna that it has dawned on the EU finance ministers that they have developed a sense of urgency and will act together. Truth is we don’t know that they will act together but ultimately there has to be a plan. Unfortunately, from where I sit, the plan won’t be good for anyone, particularly the banks. We need a flush of the credit markets with tremendous pain being visited on the private sector because the political will for government to bail out all troubled banks and PIIGS does not exist. The result would be to wipe out the equity of a number of French banks as we are seeing with Dexia, which was originally bailed out in 2008 by France and Belgium. Now here they go again. Public shareholders have twice suffered significant losses. Dexia is also a good example of contagion as the municipalities in the US that do business with Dexia will likely see their borrowing costs increase as a result. And this is a minor case of contagion; it will get worse (Plus the 2008 similarities continue with good bank/bad bank solutions that don’t work.)

My bet is that Greece defaults in a “controlled” manner (not sure that exists) with limited alimony payments from the EU as a going away gift. At the same time, Italian and Spanish debt issues are ring fenced, the French banks recapitalized after taking significant write downs which almost wipes out equity holders with new shares or debt being backstopped by Germany and France as the main players. France loses their AAA, which is past its sell-by date anyway. We will also see massive liquidity injected into the European financial system causing a further decline in the Euro.

I’m waiting for this event to increase my exposure. With the slowing in China, Europe and the U.S., I’m highly confident that I can get a better entry point and keep more hair from falling out.

AAPL – still a cheap stock and the issues are well discounted in the stock price. I’m not going to beat up on Street research – well yes I am. The Street clearly has no idea what is going on with the company. If they can’t get major product launches correct, how are they doing the more difficult task of forecasting. It took me a few days to get a number I was looking for which is what percentage of ipads sold are wifi only. I’m going with the only answer that I got which is 65 – 70%. This is interesting because much was made of the fact that the new Amazon product is only wifi. Well, at a $300 difference for a product with a great brand name and very good functionality, if I didn’t own an ipad, I would seriously consider the Kindle Fire. I know that the ipad has 425,000 apps and the Fire doesn’t, but frankly, I ran out of patience after putting the first 150,000 apps on my screen. My issue with AAPL is margins. With strong competitors like Amazon and Google (android) at lower price points, is yesterday’s pricing of the iphone 4 and 4S a harbinger of lower margins and more competition? Apple has never been one to price to competitors’ levels but shouldn’t hat have to change? Tim Cook noted that 92% of the Fortune 500 are testing ipads. The opportunities in the enterprise space are interesting but keep in mind that most likely this is demand push by Apple, a common sales technique which I am glad to see them employ. I’m sure there is reverse inquiry as well. I would also guess that corporate procurement execs are more concerned with costs in a challenging economic environment and agnostic as to which quality brand they purchase. The dominant corporate usage is also likely wifi since it will be on premises as ipads are not a good substitute for laptops. Nonetheless this is a great revenue opportunity particularly if it scales into other Apple products.

Finally, on the US. We’re still without a plan and the economic numbers continue to look punk, today’s non-mfg ISM the latest example. Freight stocks are moving higher despite yesterday’s IATA airfreight numbers remaining below seasonal trends indicating a slow economy. Asia and the US showed particularly poor.

Even though the market is oversold and will have bear market rallies, I remain on the sidelines for the most part but do like a few stocks.

Wellpoint’s valuation seems compelling at less than 9X 2011 EPS. Company guidance is in a tight range either side of $7.00. They just added $5 billion to their buyback, an astonishing 21% of the company. Management said it will be completed over several years but they just bought back $1.5 billion since announcing a $1.6 billion program in February. That was about 5%. Plus I’m getting an okay yield of 1.6%.

I also like KO. Not huge growth but very dependable, the risk to earnings from currency being discounted by recent downgrades from the Street. At a 12 P/E and 3% yield it provides good, lower beta market exposure. If market explodes higher, neither WLP or KO will lead the pack but I will participate in the upside with limited downside.

QCOM remains a core holding. Tim Cook is an engineer and over saw procurement so he’s definitely on board with QCOM as the relationship, started in earnest this year, has taken root on his watch. They own CDMA and are embedded in android as well as ipad and iphone. QCOM ahs also been very friendly to shareholders, often returning capital.

HPQ is also inexpensive, even with a haircut (all the rage in financial circles these days) to earnings. My primary concern management, including the BOD. Still wish Meg didn’t speak about making the quarter. Would rather have had her reset bar lower.


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