Apple’s fundamentals in Q2 2014 saw revenues increase 5% year-over-year, gross margins improved by 180 basis points, and earnings per share increased 15.2%. That rather good. However, when comparing Q2 2013 to Q2 2012, where revenues increased 11.2% year-over-year but gross margins declined 990 basis points and earnings per share were reduced by 18%, it’s acutely obvious how much profitability has improved year-over-year.
At the end of the day, AAPL net income in Q2 2014 increased 7% year-over-year. If you add back the 80 million shares it repurchased over the past four quarters, its earnings per share would have increased by 8% rather than the 15.2% reported. As I see it, Dilger’s essentially arguing that AAPL spent $44 billion to get 7.2 percentage points in additional EPS growth, which he believes translates into an additional $100 billion in market cap.
It’s a good argument in the short term. However, it falls apart over the long term.
Apple Stock in the Long Term
Between 2004 and 2012, the number of AAPL shares outstanding increased by 22% or 170 million. In that time, its net income grew from $276 million to $41.7 billion. It wouldn’t have mattered a lick if the number of shares outstanding increased by 10 times this amount. Apple was making so much money, investors were buying Apple stock by the bunch.
As AAPL matures, this is going to become harder to accomplish. Eventually, it’s going to have to decide whether it’s prudent to continue leveraging the balance sheet simply to avoid paying additional taxes. At a 35% tax rate, the current $132 billion in overseas cash would cost AAPL $46.2 billion to bring it all home. On a per-share basis, that’s $53.63 or about 9% of its stock price as of April 28. And while handing over more than an entire year’s worth of profit to the U.S. government is hardly a welcoming thought for most shareholders; it’s not the craziest idea in the world.
To me, what’s crazier is borrowing $34 billion — or $68 billion or who knows what — simply to dodge taxes. A long time ago, when I was selling investments rather than writing about them, a wise person told me you always consider an investment on its merits and not because of the tax savings.
From where I sit, AAPL should only do buybacks with the money it has, and if it doesn’t want to repatriate the cash it shouldn’t consider them.
Is new debt good for Apple stock? Not in the long term, not even a little.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.