Saturday, January 30, 2010

AAPL: On Sale Now

Beginning in the 1st fiscal quarter of 2010 (the three-month period ended in December 2009), Apple changed its accounting for the iPhone through the elimination of deferred revenue accounting on handset sales. 
This change in accounting method not only created a $3.815 billion increase in the company's previously reported cumulative retained earnings (increase determined by comparing the September 26, 2009 retained earnings line in Apple's 4th fiscal quarter balance sheet released in October 2009 versus the same date's balance sheet released in Apple's 1st fiscal quarter report released in January 2010), it also increased the reported revenue and earnings in Apple's first fiscal quarter and presumably future quarters in this fiscal year as iPhone unit sales continue to grow relative to prior-year periods and virtually all iPhone revenue is reported in the fiscal quarter in which the handsets are sold.
The increase in cumulative retained earnings came about through the elimination of deferred asset and liabilities on the balance sheet directly related to the previously deferred revenue for the popular iPhone.  The difference between the assets and liabilities extinguished in the accounting change was booked as earnings and is now reflected in the retained earnings line on the balance sheet. In other words, through September 2009, Apple earned $3.815 billion more than had previously been reported under the old accounting rules. For value investors and those who make investment choices based on the strength of a company's balance sheet, overnight Apple became much more attractive following adoption of the new accounting rules for iPhone revenue recognition.
A more compelling and popularly watched metric for finding value is the p/e or price-earnings multiple of the company. Under the deferred revenue model for iPhone accounting Apple's share price as a multiple of earnings per share hovered at or above 30 times trailing twelve month earnings. The elimination of deferred revenue has Apple now trading at a p/e multiple of about 18 times trailing 12-month earnings, based on Friday's closing price of $192.06.
In determining the new trailing 12-month p/e ratio or multiple I added Apple's previously "adjusted" net earnings for the fiscal quarters 2, 3 and 4 from FY '09 and the recently reported earnings for fiscal quarter 1 of FY '10 and divided the sum by the number of reported fully diluted shares as of 12/26/09 or the end of the most recent quarter. This 12-month earnings per share number was divided into Friday's closing price and yielded a trailing 12-month p/e of just under 18 times trailing 12-month earnings.
In the fiscal quarter ended 12/26/09, Apple grew revenue by 32% versus the prior-year period and earnings following revisions for the accounting change by nearly 47%. Apple is currently trading at a p/e multiple reflecting only 40% of the most recent quarter's earnings growth. Try and find a better value among large cap stocks.

At a p/e multiple of 18 times trailing 12-month earnings long-term investors may find Friday's closing price as an excellent entry point. 

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