We were expecting “an absolute blow-out holiday quarter for Apple,” and the company did not disappoint. Revenue growth of ~30% and earnings per share of $3.06 (up ~50%) blew by analyst expectations and set new records in its fiscal first quarter, as the tech giant sold an all-time quarterly best 74.5 million iPhones, simply a monumental number.
Was there really any doubt that Apple (AAPL) was going to beat expectations?
The iPhone maker’s “Valuentum-style” attributes also remain intact. We talk quite a bit about the importance of combining both valuation and technical/momentum qualities in individual equity analysis, and perhaps the best example of any idea we’ve added to the newsletter portfolios showcasing the efficacy of such a process is Apple.
Throw in a fantastic dividend yield and a safe and growing payout to a solid valuation and technical/momentum thesis, and we have a real winner. Since being added to the Dividend Growth portfolio in July 2013, Apple has roughly doubled. The company is also a leading performer in the Best Ideas portfolio. We see no reason to make any changes to the firm’s weighting in either newsletter portfolio.
The most important dynamic in the investment equation is the relationship between price and value, and Apple still looks cheap. Looking at the 16-page report on Apple’s landing page here, our fair value estimate of Apple is $135 per share, and we see upside in the valuation equation to nearly $160 per share. Since valuation analysis is based on future expectations, and the future is inherently unpredictable, a fair value range will always be the correct way to assess a company’s intrinsic worth.
Apple’s outlook for its fiscal second quarter revenue of $52-$55 billion indicates the good times will continue, and we very much liked its gross margin performance in the most recently-completed quarter, performance that was bolstered by a higher iPhone mix. Gross margin in the holiday quarter was 39.9% compared to 37.9% in the year-ago period, and top brass is targeting a range of 38.5%-39.5% in the current quarter. Sales in Asia, a new smart watch, and tumbling gas prices will be key sources of revenue upside in the fiscal second period.
You can say what you want about Apple, but for a company that generated a quarterly-record $33.7 billion in operating cash flow in the period, it’s just hard not to like the company. The executive suite continues to buy back undervalued stock, and the firm remains a highly-rated Economic Castle. Consumers can’t get enough of the larger iPhones, and Apple has only recently been able to meet demand with supply. Apple is doing almost everything right. Kudos to CEO Tim Cook (and Apple shareholders).