Apple’s Impossibly Good Quarter

Apple has been performing amazingly well for years. They keep producing blockbuster hits over and over. Not only are these hits enormously popular they are enormously profitable.

The only real objections to Apple’s stock I can see are: the overall market value is so huge it just has to collapse (over $ 400 billion – the largest in the world) or it has to be time for a huge reversal of fortunes.

The problem with the view that it will fall is that the stock is very cheap by any rational measure. You are not paying much for all the earnings. Even if Apple does not continue the trend of the last 5 years, if it just stopped growing altogether, it is still cheap (if it does continue that trend it will break $ 1 trillion by 2014 – but I don’t think it will). The biggest risk is the profit margin shrinks drastically. That is possible. It is even somewhat likely to shrink a fair amount. But there isn’t much reason to think revenues will not grow. And to me, the current price makes sense only if revenues fall and profit margins fall. It takes the worst case scenario to make this stock seem overpriced.

The data on the last quarter (and for 2011 overall) are impossible (except they actually happened).

• record quarterly revenue of $ 46.33 billion ($ 26.74 billion in 2010)
• record quarterly net profit of $ 13.06 billion ($ 6 billion in 2010)
• Gross margin was 44.7 percent compared to 38.5 percent in the year-ago quarter
• $ 17.5 billion in cash flow from operations during the quarter (and $ 38 billion in the last year)
• $ 100 billion in cash now ($ 97.6 billion to be exact but since the data was gathered they probably passed $ 100 billion anyway). That is more than the market cap of all but 52 companies in the world.

You can’t grow quarterly sales from $ 26.7 billion to $ 46.3 billion. $ 26 million to $ 46 million, fine that is possible, billions however – not possible. Except Apple did. You can’t grow a $ 6 billion quarterly profit to $ 13 billion in 1 year. Except Apple did. You can’t generate a cash flow of $ 17.5 billion in a quarter. Except Apple did. You can’t have a stockpile of $ 100 billion in cash. Except Apple does. These figure would not have been seen as unlikely just 3 years ago. They were impossible. But Apple achieved them.

These figures are not short term blips. They are the latest in a long stream of amazingly results.

Related: How Apple Can Grow from $ 200 Billion to $ 300 Billion In Market Cap – Apple Tops Google (August 2008)

Apple has numerous, incredibly strong businesses. Each could be the linchpin of an extremely valuable company.

• iPhone initial sales and reoccurring income (over 50% of Apple’s revenue)
• app sales (for iPhones, iPads and Macs)
• iPads
• iTunes
• Macs
• Their retail store business – selling all their products

Potentially huge business: Apple TV and ebook sales. It is hard to see how they could have serious stumbles in numerous of these extremely profitable businesses all at the same time.

Some more interesting figures:

• international sales accounted for 58% of sales
• 37 million iPhones (128% growth)
• 15.4 million iPads (111% growth)
• 5.2 million Macs (26% growth) – this used to be their whole business, now you forget it even exists. The MacAir is excellent, by the way, that is what I am using to write this post.
• 15.4 million iPods (21% decline)
• Apple paid $ 700 million to developers (as part of the app business) last year, and has paid out over $ 4 billion in total.
• Apple’s profit for the quarter ($ 13 billion) exceeded Google’s revenue ($ 10 billion)

I do strongly believe Apple should pay a sizable regular dividend (at least 1.5%). But I don’t know if the odds are great that they will. One risk is they blow the money in foolish ways. When you $ 100 billion and generate over $ 3 billion more each month it is hard to appreciate that risking a few billion here and a few billion there really matters.

For each business there is risk and certainly possibilities of slower growth, decline and profit margin contraction. The stock is priced for quite a bit of earnings decline. And has been for awhile. I understand the reluctance to buy a company that has a market cap over $ 400 billion. But when you look at the finances and contemplate the future it is hard to see how the stock is not cheap. There are risks. There are risks with every stock and risks to the future profitability of every company.

Having so many extremely strong, extremely profitable business puts Apple in a great position. It is hard to see how they can come up with another business line that can make a difference to the profits of a $ 400 billion company. But the stock price isn’t expecting that. It isn’t expecting growth in revenue. It isn’t expecting growth in profits. From where I sit the potential for Apple from the current price (PE of 13) is much greater than the risk. And even with a 8% increase today is cheaper than yesterday (the news is so impossibly great that 8% doesn’t capture the value of that news).

I own Apple stock, but not enough. My sleepwell portfolio includes Apple stock. I was smart enough to finally buy it after waiting for years thinking the price wasn’t good enough.

Related: Intel Reports Their Best Quarter Ever (July 2010) – Google up 13% on Great Earnings Announcement – Amazon Soars on Good Earnings and Projected Sales – Leadership quotes from Steve Jobs

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Curious Cat Investing, Economics and Personal Finance Carnival #23

Welcome to the Curious Cat Investing, Economics and Personal Finance Carnival: find useful recent personal finance, investing and economics blog posts and articles. The carnival is published twice each month. This carnival is different than others in two significant ways. First, I select posts from the blogs I read (instead of just posting those that submit to the carnival). I think this provides readers a better selection of valuable material (many of the best blogs don’t take time to submit to carnivals). And second, I include articles when I think they are interesting. I figure the primary purpose is to provide links to good recent content, so just because something isn’t a blog post doesn’t exclude it from inclusion.

• Recovering Adam Smith’s ethical economics – “He justified commercial society for its tremendous contribution to the prosperity, justice, and freedom of its members, and most particularly for the poor and powerless in society.” [This post covers a topic I think is very important and have written about several times - John]
• A Man. A Van. A Surprising Business Plan. by Zoe Chace – “Adam had tricked out the van to be a mobile solution to Chinese bureaucracy. There are a couple of Mac laptops and a printer, plus an old couch, Christmas lights and bamboo mats. It’s as cozy as a dorm room. And confused visa applicants line up outside.” [wonderful - John]
• Chart of Manufacturing Output from 2000 to 2010 by Country by John Hunter – “Europe has 4 countries in this list (if you exclude Russia) and they do not appear likely to do particularly well in the next decade, in my opinion. I would certainly expect Brazil, India, Korea and Indonesia to out produce Italy, France, UK and Spain in 2020. In 2010 the total was $ 976 billion by the European 4 to $ 961 billion by the non-European 4. In 2000 it was $ 718 billion for the European 4 to $ 343 billion (remember all the data is in 2010 USD).”
• Ultimate Sustainable Dividend Portfolio – “I would expect the Ultimate Sustainable to do better in difficult times and worse in great times. Why? The USDP is a more stable portfolio that will fluctuate less over time…”
• The Renminbi is the Love Child of the Baht and the Króna – “When crisis hit Thailand in 1996 and Iceland in 2008, the baht lost half of its value against the U.S. dollar, and the króna lost over 60% against the euro. The growth in the money supply leading up to the crisis in both currencies is the same trend we see occurring with the Renminbi now.”
• Making It in America by Adam Davidson, the Atlantic – “manufacturing output continues to grow strongly; in the past decade alone, output from American factories, adjusted for inflation, has risen by a third. Yet the success of American manufacturers has come at a cost. Factories have replaced millions of workers with machines.”
• Why I Am Switching Career Tracks – “My plan is to expand my online efforts to the point that it replaces day job. Once this happens, I plan to work on creating truly passive income streams that can be managed in less than 3 days each week. I plan to incorporate real estate and dividend stocks to complement my online business.”

If you would like to be considered for guest hosting a future edition of the carnival please make a comment including a link to your blog. I will be selective in what blogs I have guest host. My management blog has been hosting a carnival for years now.

Related: 2011 annual management blog roundup

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Looking at GDP Growth Per Capita for Selected Countries from 1970 to 2010

I decided to take a look at some historical economic data to see if some of my beliefs were accurate (largely about how well Singapore has done) and learn a bit more while I was at it.

GDP in USD for countries

I just picked countries that interested me and seemed worth looking at. I looked for some around the starting position of Singapore and close to Singapore geographically. And looked at Panama as the closest match to Singapore (for Singapore’s main 1970 asset, convenient for shipping lanes, and very close for GDP per capita).

Malaysia and Singapore were 1 country after independence (from 1963-1965).

I can’t imagine more than a couple countries could reasonably be argued to have had better economic performance from 1970 to 2010 than Singapore (Korea? China? Who else?). Singapore had very little going for it in 1970. They had a good location for shipping and that is about it macro-economically. No natural resources. No huge storage of wealth. No preeminence in science, technology or business.

It seems to me that Singapore actually did have 1 other thing. A government that was to preside over a fantastic economic growth success. You won’t find many textbooks talking about the way to economic success is a very well run government. And there is good reason for that, I believe. Relying on a very well run government will nearly always fail. In some ways Singapore was like Japan but with significantly more government influence on the way economic development played out.

I was surprised how poorly the USA has faired. It isn’t so surprising that we lagged. People forget how rich the USA was in 1970. The USA is still very rich but bunched together with lots of other rich countries instead of way out ahead as they were in 1970. And in 1970 the lead was already contracting, for what it had been earlier. But even knowing the relative performance of the USA had lagged, I was surprised by how much it under-performed.

I was also surprised with India. I knew they have done poorly but I didn’t realize it had been this poor. The failures to greatly improve infrastructure, education and the stifling effect of their bureaucracy have been causing them great harm. They have been doing some good things in the last 10 years especially but still have a long way to go. Their premier education is actually pretty decent. The problem is the other 90% of the education is often poor and many people (especially women) hardly have any education at all. It is very hard to get ahead when you fail to take advantage of the talents of so many of your people.

Related: Singapore and Iskandar Malaysia – Chart of Largest Petroleum Consuming Countries from 1980 to 2010 – Chart of Nuclear Power Production by Country from 1985-2009 – Top Countries For Renewable Energy Capacity

** I made an adjustment which distorts the data a bit but seems fine to me. I adjusted the 1970 figure provided by the source using the US Fed price deflator. I took 24 for 1970 and 111 for 2010. Then I divided 111 by 24 = 4.625. So I multiplied the 1970 figure by 4.625 so that the 2010 and 1970 figures are reported on an equivalent basis (so $ 10,000 in 1970 column = $ 10,000 in the 2010 column). Then the percentage increase are not having inflation inflating the percentage increase. Also it makes the 1970s figure more easily understandable (it is hard to appreciate that $ 2,500 is a high figure for GDP per capita).

*** many of the 2010 figures are IMF forecasts

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