Apple (AAPL) Earnings – What Next?

AAPL bulls can buy the stock outright at cheap levels or employ options strategies to generate more income

   

Apple (NASDAQ:AAPL) announced Q4 earnings after the close Wednesday. All the comparisons adjust for Q4 in 2012 having 13 weeks and Q4 in 2011 had 14 weeks, so in short:

  • Revenues were $54.5 billion, up 25% over calendar Q4 2012 when the quarters are adjusted – this Q4 had 13 weeks, Q4 in 2012 has 14weeks.
  • Profits were $13.81 billion, up 13.5% over calendar Q4 2012
  • iPhone sales were 47.8 million, up 39%
  • iPad sales were 22.9 million, up 64%
  • Mac sales were 4.1 million, down 15%
  • Cash on the balance sheet was $137 billion or 28% of the market cap at the close of trading.

And with these numbers, by far better than any company in tech land or the S&P 500, the stock sold off in after-hours trading.

The company, regardless of the seemingly endless and unfounded concerns by analysts, traders and erstwhile Apple experts, is clicking on all cylinders and these are astounding results in a world economy barely growing.

Apple is now a Warren Buffett company – an overwhelming brand company with a strong management group and product lineup selling at a deep discount to the market and loaded with cash. If he could afford to, I bet Buffett would buy Apple.

Apple is growing more than 20% a year. In fact, if it is a bad year, it will be just 20%, but it could be more than 30%, as the range from analysts is quite wide.  And it makes money on its hardware products, something that’s not for most of its competitors.

That is the company. What about the stock?

One year ago, the stock closed at $423.65; the stock Wednesday at $509.45, up 20% but well off its high north of $700. The S&P 500 is up 13% during the same time period. Not fair – Apple’s earnings will come in up more than 35%, the S&P 500 earnings were up 2%.

From a fundamental valuation point of view, the stock is selling at a discount of 12% to the S&P based on trailing earnings; it is selling at a discount of more than double that based on consensus estimates for AAPL and the S&P 500. Google (NASDAQ:GOOG) sells for 31 times trailing earnings, Apple for less than 12 time. And Apple has far stronger profit growth.

If you go a bit deeper and look at enterprise valuations – taking the value of its cash into account – the stock is selling at a more than 40% forward discount to the S&P 500. Not to mention it is growing and the rest of the S&P is barely seeing any revenue growth.

And the market does not care – at least not right now. The traders have taken hold, and people are still taking some profits, giving investors the opportunity of a lifetime to buy the best company on the planet at a 25%-40% discount to the market. Yes, investors.

But what about traders? Let the stock stabilize through the end of the week. Then if you agree with me, buy AAPL and immediately sell (write) calls against your stock, which is essentially a covered call strategy. The sale of AAPL weekly or monthly calls will produce a 20% or more return if managed properly, even if the stock does not move.

Or look to sell to open (short) an AAPL February put about four strikes below wherever it settles on Friday – but remember that any time you sell to open a put against a stock, only write as many puts that correspond to the number of shares of the stock you’re ultimately willing and able to take ownership of.

When you sell puts, the ideal outcome is that as AAPL’s value continues to rise, the value of the put will drop and you can buy the short puts back to cover for cheaper or even let them expire worthless to keep the premium you collected. But if the strategy goes against you, the “worst case” scenario is that you are “put” AAPL stock at the strike price of the puts you shorted, which means you’ve picked up a great stock at an even bigger discount.

So, if you sell to open 1 AAPL 495 put, make sure you have enough capital in your account to take ownership of 100 shares of AAPL at $495 if the stock should drop that far. Again, the worst case is that you get to own a great stock for a great price and regardless you get to keep the premium you collected upfront from shorting the puts.

Right now, the stock is on sale. You might was well generate a great deal of cash and income and enjoy the sale the while it lasts.

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