Apple (AAPL) hit the ball out of the park again in its fiscal fourth-quarter results ended September 26. Apple skeptics are in some ways like Chicago Cubs fans, often saying “wait until next year,” but in both cases, we think Apple and the Cubbies are the real deal (Valuentum is based in the Chicagoland area). As the iPhone giant strings strong report after strong report together, at what point does the market finally give it full credit in the valuation context? Shares continue to trade at less than 9 times earnings, excluding net cash on the balance sheet, as we outlined in the following: “Quantifying Apple’s Tremendous Investment Case.” That is a phenomenal value in today’s still-overheated equity market.
The iPhone maker reported quarterly revenue of $51.5 billion, better than the $42.1 billion in last year’s period, and quarterly net profit of $11.1 billion, better than the $8.5 billion in the September quarter last year. Apple noted that “growth was fueled by record fourth-quarter sales of its iPhone, the expanded availability of Apple Watch, and all-time records for Mac sales and revenue from services.” In aggregate, we were very pleased with the top-line performance, and that the company’s gross margin expanded to nearly 40%, an approximate two percentage-point bump from last year’s quarter, was notable. The willingness of customers to continue to pay a premium for access to the Apple ecosystem and the company’s bargaining power over suppliers continues to be on display.
We’re not expecting too much of a reaction following the report, and we think Apple investors may start to de-risk ever-so-slightly in advance of the holiday season. Investors in Apple are likely sitting on significant gains, much like the positions in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, and taking some off the table may offer a prudent course of action, even if the holiday season is a blockbuster one for Apple. In any case, CEO Tim Cook believes the company “is heading into the holidays with the strongest product lineup yet,” and we agree. We’re expecting continued strength from the iPhone 6s and iPhone 6s Plus, and the Apple Watch may even surprise to the upside, as we think it may be a unique gift for every demographic this holiday season.
Apple ended the September quarter with an incredible $206 billion in cash and marketable securities, which stacks up against a short- and long-term debt load of ~$56 billion, resulting in a net cash position of ~$150 billion, or about 23% of its market capitalization. With the cash on the books, Apple effectively could scoop up Boeing (BA), Ford (F) and General Motors (GM), though it may have to throw in some cash generated during the quarter to seal the deals. Such comparisons help keep things in perspective for readers. What Apple will be in 10 or 15 years from now could simply defy all expectations. Reseach firm Morningstar (MORN) talks a lot about the “5 sources” of an economic moat (MOAT), but we think cash is the sixth source. Apple can buy any competitor or threat out there. The company has staying power!
In this light, we don’t think the “Apple discount” is warranted, perhaps applied in part due to the belief that someday it may turn into the very victims it created, Motorola (MSI) and Blackberry (BBRY), with the RAZR and namesake, respectively. We can’t see that happening, but if there is any company that may knock Apple down from the pedestal in coming decades, its likely one already in the newsletter portfolios, Google (GOOG, GOOGL) or Microsoft (MSFT). We value shares of Apple at $142 each, and we think the iPhone maker has all the makings of a Dividend-Aristocrat-to-be. We don’t expect to make any changes to the positions in the newsletter portfolios at the moment.