Saturday, July 26, 2014

Apple's Game Of Inches

On Friday, July 25, 2014, Apple’s share price reached a 52-week closing high of $97.67. This was also the highest split-adjusted closing price since September 24, 2012 and within range of the all-time high closing price of $100.30 set on September 19, 2012.

From the closing high of 100.30 on September 19, 2012 to the closing share price nadir of $55.79 on April 19, 2013 to Friday’s closing price of $97.67, it’s been a startling roller coaster ride for Apple’s long-term shareholders. It’s simply a matter of time before Apple’s share price vaults above its previous all-time closing high and begins an ongoing series of new records.

Despite the share price volatility of the past two years, Apple’s growth moving forward will be best seen in sublime advances of technologies and less in sharp spikes and slides in revenue and earnings growth rates that have characterized the past four years of the company’s financial performance.

Apple is engaged in a game of inches and has entered an era that will again reward long-term shareholders for their conviction, patience and grit. 

Apple’s Return To Glory
While much attention has been placed on Apple’s recent 7-for-1 stock split, the share price rise from the closing price on the first day of post-split trading on June 9, 2014 of $93.70 to Friday's closing price represents a share price gain of 4.24%.

However, the share price rise from the closing price immediately prior to the release of March quarter results on April 23, 2014 has been 30.29%. Apple’s return to organic net growth income growth has delivered extraordinary share price gains in just over three months. Apple has now concluded two consecutive quarters of net income growth following a four-quarter slide in underlying profitability. 

The graph below illustrates the company’s net income performance over the most recent nineteen fiscal quarters. Rising net income is and will remain the primary catalyst for Apple’s share price appreciation.

Apple’s Game Of Inches
The graphs below illustrate Apple’s revenue and earnings per share performance over the most recent nineteen fiscal quarters.

There’s no disputing the fact Apple’s rates of revenue growth have slowed following the hyper-growth phase that encompassed the release of the Apple iPad in FY2010 through FY2012. In addition to expected revenue growth from Apple’s existing device lines and established services, new lines of accessories and new services will contribute to sustained revenue growth for the foreseeable future. However, it’s unlikely Apple will return to the meteoric revenue growth rates last seen in the first half of FY2012. To promote share price appreciation for the benefit of long-term investors, high single-digit to low double-digit revenue growth rates are all that’s needed. 

The graph above illustrates Apple’s earnings per share performance over the past nineteen fiscal quarters. The return to organic net income growth in the March quarter combined with the ongoing share repurchase program have changed Apple’s eps “picture” quite dramatically in the past six months or two fiscal quarters. 

The Trend Is Apple’s Friend
A more simple view of Apple’s revenue and earnings per share growth performance is illustrated in the graph below. While Apple’s rates of revenue and earnings per share growth have changed markedly over the past several quarters, even modest rates of revenue growth combined with organic net income growth and the impact of the ambitious share repurchase program will deliver impressive earnings per share growth rates for the foreseeable future. The recent return to net income growth amplified by the share repurchase program creates a foundation or springboard to support share price appreciation over the next several quarters.

Apple’s Continuity
In his opening remarks during last week’s quarterly conference call with analysts, Apple CEO Tim Cook highlighted the company’s “continuity” approach to cross-device features and functionality, not the least of which will be the ability to make and receive iPhone calls on one’s Mac. It’s continuity across device lines that will add appeal to the company’s products and its continuity in net income growth that will propel the share price higher. Although Apple’s rates of revenue and net income growth have moderated from the FY2011 & FY2012 highs, even modest rates of revenue and net income growth will propel the share price higher. 

Apple’s Ongoing Share Repurchase Program
The graph below illustrates the significant changes in Apple’s fully diluted share count since the start of the $90 billion share repurchase program. As of June 28, 2014, Apple’s outstanding share count stood at $5.989 billion shares with 6.052 billion fully-diluted shares as the weighted average reported for the June quarter. According to Apple’s 10-Q for the June quarter, as of June 28, 2014, $50.9 billion of the $90 billion program had been utilized for share repurchases. Historical numbers have been adjusted for the recent share split.

Apple’s ongoing share repurchase plan will amplify the impact of the company's underlying rates of net income growth on earnings per share on a quarterly basis through the expiration of the $90 billion program. With or without an expansion of Apple’s price-earnings multiple, even modest rates of revenue growth and net income growth will push the share price appreciably higher. 

Looking Back
Over the first nine months of the current fiscal year, Apple’s revenue grew by 5.42% to $140.672 billion, net income moved higher by 5.14% and earning per share rose 12.02% to $5.03. Even with modest rates of net income growth, the share price has responded positively to Apple’s increased profitability and double-digit gains in earnings per share. 

Moving Forward…
This fall may represent among the most ambitious cycles for product refreshes and the introduction of new services and accessories in Apple’s storied history. On a revenue base in the range of $180 billion this fiscal year, even a very strong refresh cycle and the introduction of much-anticipated new accessories and services will not return revenue growth rates to the levels of FY2010 through FY2012.

But consistent revenue growth and continuity in net income growth through Apple’s game of inches will move the share price a country mile over time for long-term investors.

Robert Paul Leitao

Disclosure: The author is long Apple shares