The Situation behind Apple’s Shares; time to Buy or Sell?

Share price on day-end 14/01/13
Share price on day-end 14/01/13

I recommend before reading this post that you zoom out (“cmd-” on a mac) as the text will be easier on the eye.

The past 4 months have been somewhat disappointing for Apple’s Share price seeing a fall of -28.3% since it’s peak in September.

In this blog I’m going to use ratios to fundamentally analyse Apple’s income and financial statements and then look at overall market conditions to try and get a general feel why the share price seems to be heading down. I suspect fundamentals to be very strong, so the issue here is likely to be market mentality and expectations of future earnings.

I used the Income Statements and Balance Sheets available at Yahoo!Finance.

Fundamental Analysis: Ratios

Ratios Sept. 2012 Sept. 2011
Profitability
Gross Profit margin 43.87% 40.48%
R.O.C.E 40.17% 38.2%
ROSF 35.3% 33.8%
Liquidity
Current ratio 1.50:1 1.61:1
Acid Test ratio 1.48:1 1.58:1
Efficiency
Receivables days 49.62 days 46.3 days
Payables days 135.4 days 135.3 days
Inventory turnover days 111 times 83 times
Financial
Gearing 14.04% 13.3%
P/E 15.11 13.78

Profitability

Gross Profit

  • Change: +3.87%
  • Reason for Change: could incl. purchase prices being cheaper maybe due to bulk buying through economies of scale, or Apple could be selling their finished product at a higher price. Better margin = better profitability.
  • Verdict: Good

Return on Capital Employed

  • Change: +4%
  • Reason for Change: Better use of capital employed (equity&debt) could be one reason, however I suspect much stronger profits ($42bil vs $26bil) is the main reason behind this change.
  • Verdict: Good

Return on Shareholder’s Funds

  • Change: +1.5%
  • Reason for Change: Increased profitability being the main reason. Not a massive increase considering the share price rose 68% over this from Sept 2011 to Sept 2012.
  • Verdict: Moderate

Liquidity

Current Ratio & Acid Test:

  • Change: -0.11 and -0.12 respectively
  • Reason for Change: An increase in current liabilities could be the issue here. However the ratios are still at respectable levels, they would only be an issue should they drop below 1.
  • Verdict: Decent

Efficiency

Trade Receivables days

  • Change: +3.3 days
  • Reason for Change: Different terms of contract with debtors, Apple should look to reduce receivables days in order to free up credit that can be used to expand the business. However at 49 days it is quite a good level.
  • Verdict: Decent

Trade Payables days

  • Change: +0.01 days
  • Reason for Change: Not much change at all. Apple should look to increase payables days, as that will give them more credit freedom. At 135 days it is currently at a good level, however I am slightly concerned; I would need to see the terms of trade to make sure that Apple is not having difficulty paying it’s payables. However with it’s large cash pot I highly doubt it’s an issue.
  • Verdict: Decent

Inventory Turnover

  • Change: +28 times
  • Reason for Change: Could indicate that Apple is having inventory shortages, the ratio is extremely high at 111 times. Therefore demand for Apple products could be far exceeding the supply, this should be an issue Apple addresses quickly, as reducing Inv. Turnover should result in higher profits.
  • Verdict: Concerned

Financials

Gearing

  • Change: +0.74%
  • Reason for Change: Although Apple has no official long-term debt there are a few non-current liabilities. I would not be concerned with the change and level of this ratio; it is still very low and could indicate that Apple can take on long-term debt to increase profits and returns to shareholders.
  • Verdict: Good

Price to Earnings Ratio

  • Change: +1.33
  • Reason for Change: Higher demand for Apple shares pushing the P/e ratio higher, still at a relatively low level of 15.11 considering average p/e over the past century has been 13.
  • Verdict: Expected

What do these ratios say about Apple?

These ratios show that Apple fundamentals are very strong. The main issues of highlight would be Return of Shareholder’s Funds, Inventory Turnover and Trade Receivables.

For ROSF, considering Apple’s magnificent profits growth I would have expected a larger increase. Inventory Turnover is currently extremely high at 111 times, indicating inventory shortages, and lastly Trade Receivables days have increased 3 days; Apple should look to decrease Trade Receivables days in order to free up credit to invest in the business.

Can’t value a company on two accounting periods alone.

Although these ratios help give us an idea of how Apple is operating financially, it is un-wise to judge a company on ratios from just two accounting periods. We would need to compare the ratios with industry averages and other similar companies (such as Google) to get an idea of where Apple stands in the market. Furthermore different accounting methods can change how the company is viewed in it’s ratios; Apple, for example, has set aside billions of dollars to pay US corporate tax on it’s foreign earnings – however it hasn’t repatriated those earnings; the result is billions of dollars of un-marked profits on it’s balance sheets – if recorded that would increase their profitability ratios substantially (article here).

Theses ratios show the accounting period just before the peak share price of 705 on the 18th September, so what has happened since that has caused the share price to fall more then -20%?

A lot of the most recent decline has been momentum driven. Apple over the summer failed to impress, producing new products, which were nothing but minor improvements on previous products (i.e. iPad mini and iPhone 5). The markets are concerned about Apple’s future growth and aspirations. Other companies such as Samsung are producing increasingly similar, if not better, products and Apple is failing to out-compete. Recently the share price has dropped to as low as 500, due to concerns of a reduction in demand for the iPhone as Apple cuts orders (bloomberg article).

Not only has demand fallen for their devices, but Apple is also struggling to get a foothold into the emerging markets (article by bloomberg). Android, with it’s cheaper devices and operating system, is producing the cheap (cost-wise, not quality-wise) products that emerging markets can afford; in order to compete Apple need to change their strategy and start marketing cheaper products, which will be hard for Apple who have built up their brand on value-added and high-end products.

What can Apple do to increase the market value of their shares?

Apple need to inspire the markets, producing a product that is new and innovative, as well as a product that has fantastic emerging market potential. Saying this is easy, but seeing it happen is another thing altogether.

It can be argued that Apple has been over-weighted recently, with too much ‘hype’ about the shares. Apple was at one point the most valued company of all time (article BBC) For a company that sells minority high-end products this was not going to be sustainable.

With a P/E at 15.11 when their shares were at the highest, there will be scope for Apple shares to rise in the future. It is certainly not the end for Apple and some might say that now is the perfect time to invest in Apple whilst the share price is cheap.

I’ll leave you with this great video from Bloomberg addressing Apple: http://bloom.bg/W4bm1Z

I hope this blog has helped your understanding of Apple share price, through it’s fundamentals and recent turmoil in the markets. I’m not liable for any investment decisions made by the readers of this blog as a result of this post.

Ed

Follow me on @breadeconomics for updates. I posted a similar blog about BT Group’s shares last month, click here to view.

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