Saturday, April 26, 2014

Apple’s Newfound Glory

On Wednesday, April 23rd, Apple triumphantly surprised the market with a return to net income growth in the March quarter following a four-quarter cycle of declining profitability. Although Apple did not set a record for March quarter net income, the company delivered record March quarter revenue and an impressive 22.40% of revenue to the net income line.

The graph below illustrates Apple’s net income performance and the percentage of revenue that has flowed to the net income line over the most recent eighteen quarters. 

On revenue of $45.646 billion, $10.223 billion flowed to the net income line. This was the fifth-highest net income performance in the company’s history and second-highest March quarter net income performance, eclipsed only by the results in the March quarter of FY2012. 

Stock Split and Expanded Share repurchase Program
With the release of March quarter results Apple also announced a 7-for-1 stock split. The likelihood Apple will be added to the Dow Jones Industrial Average (DJIA) after the completion of the stock split in early June added fuel to the immediate post-earnings share price rally. Following the release of the company’s March quarter numbers and accompanying announcements, the share price jumped from a closing price on Wednesday of $524.75 to end the trading week at $571.94. With a current market cap of over one-half trillion dollars, rising revenue, rising quarterly dividends and anticipated fiscal year revenue of over $180 billion, the addition of Apple to the well-known index is viewed as a near certainty after completion of the 7-for-1 stock split.

Apple is increasing its share repurchase program from $60 billion to $90 billion with all purchases to be completed by the end of calendar year 2015. As of the close of the March quarter, Apple had utilized $45.9 billion of the previously authorized $60 billion for repurchases.

The graph below illustrates the dramatic drop in the company’s reported fully diluted share count over the past several quarters.

Management also announced with the March quarter results the company would be returning to the debt table to borrow against the company’s massive overseas holdings of cash and marketable securities. Although Apple reports a US tax expense on all foreign-sourced earnings not permanently dedicated for use outside the US, the payments are not due until the funds are repatriated. As of March 29, 2014, Apple has $19.471 billion in deferred tax liabilities on the balance sheet and $17.0 billion in previously acquired debt for share repurchases.