Shares of Apple (AAPL) rose to a ten-month high after reporting stronger-than-expected quarterly results after Monday night’s bell. At the same time, the company posted a 9% drop in Q4 profits compared with 2012.
Hm. Is now really the time to take a bite out of AAPL? Let’s look at the company’s near- and long-term profit prospects to find out.
From tablets to smartphones to mp3 players, Apple has made its mission to put the “i” in consumer electronics. The company’s iPod and iTunes lead the digital music industry, and the iPhone is one of the hottest smartphones out there. AAPL also hasn’t forgotten its personal computing roots and has cut into the dominance of Windows with its OS X operating system and fleet of Mac computers.
Apple is a regular in the major market headlines, as consumer appetite for its products seems to be nearly insatiable. People around the world will gladly stand in line for hours, even days, to be among the first to get their hands on the next generation of products.
In the fourth quarter, Apple brought in a record $37.47 billion in sales. This was 4% above Q4 2012 sales and topped the $36.84 billion consensus estimate by a hair. Management announced that Apple sold nearly 34 million iPhones, 14 million iPads, 4.6 million Macs and 3.5 million iPods.
Meanwhile, the net income fell 9% to $7.5 billion, or $8.26 per share. This is the third quarter in a row that Apple has posted declining year-over-year profits. Still, adjusted EPS still came above analyst estimates of $7.93 per share.
However, following the earnings announcement, many in the analyst community reduced their estimates for next quarter and next year. Looking ahead to FY 2014, Apple is headed towards just 6.4% annual sales growth and 8.6% earnings growth—nowhere near the kind of growth we’ve seen in past quarters.
Value Vs. Growth
Now that the company’s margins are being squeezed, it is clear that AAPL is no longer a growth stock. Instead, Apple is trying to curry favor with shareholders and rebrand itself as a value investment. Management plans to return $100 billion to its shareholders by the end of calendar 2015. If all goes according to plan, between dividends and stock buybacks, Apple will pay an average of $30 billion per year to investors.
Currently, Apple has a $60 billion stock buyback program underway and the stock currently yields 2.3%. Icahn is looking for Apple to borrow on the bond market and repurchase $150 billion of its stock. Speaking of ex-dividends, AAPL just declared a cash dividend of $3.05 per share. Shareholders of record on November 11 will be paid on November 14.
This time last year, AAPL was an A-rated buy. However, with maturing sales and a lackluster earnings environment, the stock’s grade has slipped. Currently, Apple receives decent marks for cash flow and return on equity. But the company completely misses on sales growth, operating margin growth, earnings growth and earnings momentum (which are all D-rated). I would like to see top- and bottom-line growth return and for the company to return to the days when it blew out analysts estimates before I would recommend this company for new money. AAPL receives a C for its Fundamental Grade. But the real nail in the coffin for this stock is its F-rated Quantitative Grade, which reflects the recent plunge in buying pressure.
As of this posting on October 29, I consider AAPL a D-rated Sell.
First off, this is not a reflection of Apple’s long-term financial prospects. Apple continues to dominate the app and smartphone market. However, because analysts have been steadily revising down their estimates for Apple’s future earnings, we’ve seen buying pressure fall for this stock. This month the stock has bounced back on the latest earnings results, but going off analyst earnings estimates I’m going to err on the side of caution and look for better profit opportunities elsewhere.