Wednesday, April 25, 2012

Is Tim Cook the Real Hero at Apple?

Apple reported earnings last night, and they were simply astonishing.

Not surprisingly, the stock is up more than +9% at this writing - an amazing move for a stock with a market capitalization of more than $500 billion.

Oh, and not to mention that prior to today's move Apple stock was up +38% year-to-date.

Here's what the New York Times wrote this morning:

The company reported Tuesday that soaring sales of the iPhone, especially in China, helped Apple nearly double its profit in the company’s fiscal second quarter. 

Apple said it sold 35.1 million iPhones in the quarter, an 88 percent increase from the period a year ago. It sold 11.8 million iPads, more than double the number it sold in the same quarter last year. 

The article continues:

For the quarter that ended March 31, the company reported net income of $11.62 billion, or $12.30 a share, compared with $5.99 billion, or $6.40 a share, in the period a year earlier. 

Apple’s revenue was $39.19 billion, up from $24.67 billion a year ago.
Mr. Cook said that Apple’s quarterly revenue from China was $7.9 billion, about 20 percent of total company revenue. Furthermore, that was triple Apple’s China sales in the same period a year ago. In contrast, Apple’s China sales during its last fiscal year were about 12 percent of total revenue. Two years ago, Apple sales in China were 2 percent. 

There is so much to pause and digest in these figures that I could spend the rest of the day analyzing  the company.

But I am fixated on the company's ability to deliver 35 million iPhones, nearly double the pace of a year ago, as well as incredibly amount of iPads, more than two times the same amount of a year ago.

I can't prove it, but I would bet that nearly all of iPhones and iPads worked right out of the box.  

No design flaws, no excuses:  Apple products work.

This is the result of an incredible attention to detail in the the manufacturing of Apple products, lead by new CEO Tim Cook.

Steve Jobs was obviously the design genius behind Apple products, yet without the manufacturing sophistication to deliver massive quantities of high quality products Apple would not be the company it is today.

So what to do with the stock?

This is obviously a tough question.  The valuation of Apple is not out of line - at today's levels, it sports a price/earnings ratio of around 12x.  Relative to its incredible growth rate, Apple is arguably one of the cheapest stocks in the S&P 500.

It also now has an incredible $110 billion in cash reserves.  Although it recently announced that it will now pay a dividend that will offer a 1.8% yield to investors, from a financial standpoint Apple is the master of all it sees.

That said, there will be a time that Apple will fall to earth.

Here's what top ranked Bernstein analyst Toni Sacconaghi wrote this morning:

Despite strong Q2 results, we caution investors that revenue and EPS estimates for Q3 and Q4 may not increase, and note that relative to consensus, Apple's revenue guidance for FY Q3 was its 2nd most conservative in the last three years ; moreover, last time Apple gave guidance that was similarly conservative (for Q4 FY 11), it ultimately missed consensus revenues and EPS (which both of which had been revised upwards post-guidance).

But for now, if you're an equity manager trying to beat the S&P 500, it's tough to bet against Apple.