We continue to like Apple. It has been a bright spot in an otherwise challenging calendar second-quarter earnings season.
By Brian Nelson, CFA
It’s hard to get excited about Apple’s (AAPL) fantastic performance given the bloodbath at Facebook (FB) and Twitter (TWTR) of late, but the iPhone maker’s shares have been on an absolute tear! For those just getting familiar with the simulated Dividend Growth Newsletter portfolio, Apple is among the highest-weighted ideas, and it has been so for some time (Apple is among the highest-weighted stocks in the simulated Best Ideas Newsletter portfolio, too).
The company simply has investors excited, and we still think shares are undervalued on the basis of our enterprise discounted cash flow model. We value shares of Apple at $220 each, with the high end of the fair value range at $260, implying considerable upside if the market comes to recognizing the value we see in the company. Shares of Apple currently yield just ~1.5%, not as much as we would like, but we expect dividend growth to be phenomenal in coming years. It raised its quarterly dividend nearly 16% in May.
Apple has been a “Valuentum” stock for some time, having been a staple of both the simulated Dividend Growth Newsletter portfolio and simulated Best Ideas Newsletter portfolio for years. The market always seems to want to truncate the company’s growth prospects, but we think Apple’s ecosystem makes it a completely different kind of technology “play” than those that have fallen from grace such as Motorola or Palm (remember the Palm Pilot?). We don’t plan to make any moves in either simulated newsletter portfolio following Apple’s third-quarter report, which was the company’s best June quarter ever.
Apple’s revenue advanced 17% during the period, while quarterly earnings per diluted share jumped to $2.34, an advance of 40% on a year-over-year basis. We think the market also liked commentary that trade spats between the US and China aren’t having much of an impact on its business. This, of course, could change on a dime, but we think both countries know the importance of free trade, and rational heads will prevail. Free cash flow came in at $47.6 billion during the first nine months of the fiscal year, nearly 5 times that of cash payments for dividends, which stood at $10.2 billion over the same measurement period. Its $141 billion net cash position only bolsters its dividend strength.
We know that many investors generally like to trade around Apple’s product releases, but the company has been a tried-and-true idea regardless, and we think its war chest of cash, which can be used for increased dividends or aggressive buybacks (it launched a $100 billion share repurchase program in May), or even to widen its moat by scooping up unique technology or acquiring smaller rivals before they become problematic, is a huge competitive advantage. In what has otherwise been a rather challenging second-quarter earnings season thus far, we were pleased with the Apple news. It is a Highest-Rated Economic Castle.
Related: QQQ
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.