Barron’s: Apple is a top stock pick for next year

“How much worse does it get for Apple stock? Probably not a lot.”

From Top 10 Stock Picks for 2019 ($)

The shares are down more than 20%, to $171, in the wake of a disappointing earnings report for the September quarter. Wall Street has reacted to weak guidance for the current quarter, production cutbacks at iPhone suppliers, and the company’s move to stop disclosing unit sales of iPhone, iPad, and Mac devices—an indication that critical iPhone sales may be headed lower.

The stock is finding support because its valuation looks attractive and there appears to be limited risk to current-year earnings even if one assumes a 5% to 10% decline in iPhone sales. Apple now trades for 13 times projected earnings of $13.30 a share in its fiscal year ending in September. The P/E ratio is about 11 when Apple’s $25 a share in net cash is stripped out.

“It is difficult to see earnings declining below fiscal-year 2018 levels of $11.91, due to strong year-over-year contributions from services, wearables, and buybacks,” Bernstein analyst Toni Sacconaghi wrote recently. And Piper Jaffray analyst Michael Olson wrote last week that “international iPhone weakness and disappointment over future unit disclosure are largely baked into the stock.” He maintained an Overweight rating but cut his price target to $222 from $250.

 Apple’s high-margin services revenues—including App Store, Apple Music, and Apple Care—rose 24% in the latest year, to $37 billion, and are on track to hit $50 billion by 2020. In Barron’s cover story last week, we suggested that the company could package some of its services, or iPhones and services, into an attractive monthly subscription service.

One big buyer of the stock in the coming year will be Apple itself. It has the world’s largest repurchase program and is expected to buy back about $70 billion of shares in the current fiscal year, or 8% of those outstanding. Investors also get a 1.8% yield.

My take: “Disappointing earnings report for the September quarter”? May I remind Barron’s of Apple’s results for fiscal Q4 2018:

  • Revenues up 20%
  • iPhone units flat
  • iPhone ASPs up 29%
  • EPS up 41%
  • Services up 17%
  • China revenue up 16%

Today’s full list of Barron’s picks, in alphabetical order: Alphabet, Apple, Bank of America, BlackRock, Caterpillar, Chevron, Daimler, Delta Air Lines, Energy Transfer and Toll Brothers.

19 Comments

  1. Jonny Tilney said:

    And moreover Q1 guidance that was bang in the middle of concensus estimates….

    3
    December 15, 2018
    • Alan Birnbaum said:

      these are the times that try men’s souls ( Thomas Paine)

      …. but make long term holders wealthy !!

      0
      December 16, 2018
  2. Robert Paul Leitao said:

    There was absolutely nothing that was disappointing about Apple’s September quarter results and the full fiscal year’s eps gain of nearly 30% leading into the the first fiscal quarter of FY2019. For the current quarter Apple has guided to record quarterly revenue.

    To suggest Apple has chosen not to disclose device line unit sales as “an indication that critical iPhone sales may be headed lower” is a false leap of logic. Apple is choosing to no longer disclose unit sales because release dates for updated products now vary and for the iPhone line in particular release dates are moving between fiscal years.

    It’s possible iPhone unit sales in FY2019 will be lower than unit sales in FY2018. This is not because iPhones are becoming less popular. Quite the contrary. The global installed base of iPhone users is growing at double-digit rates each year. Apple produces the highest quality handsets on the planet. The average age of iPhones in active user has now surpassed three years. Why fault an enterprise for producing high quality products that remain in service for far longer than the handsets made by any other manufacturer? The global market for pre-owned iPhones is growing rapidly and enlarging the global base of users by the day.

    Apple is pricing new iPhones commensurate with the high costs of engineering, design and manufacture. Why fault an enterprise for choosing innovation and pricing the company’s products accordingly? The world is awash with cheap handsets made by other manufacturers that last only a fraction of the time an iPhone remains in service and are sold at razor-thin margins.

    Due to the large and robust global market for pre-owned iPhones, the best proxy for gauging the company’s growth and economic influence is no longer new device sales. It is Services revenue which is growing at a greater than 20% pace.

    In FY2018 Apple had recognized revenue of nearly $266 billion and the current Street consensus revenue estimate for FY2019 is over $278 billion or a revenue growth rate of more than 4.8% which handily exceeds the estimated rates of domestic and global economic growth.

    On an annual revenue base of well over one-quarter trillion dollars, release dates for new iPhones moving between fiscal years and a rapidly growing global installed base of device users, old metrics for growth no longer apply and conventional metrics to gauge the company’s success are now antiquated.

    FY2019 is likely to represent the first consecutive year of record revenue since FY2015 and the first consecutive year of record net income since FY2012. Meanwhile, Services revenue is likely to exceed the combined revenue of the Mac and iPad lines.

    Apple’s success can no longer be measured or defined by any one fiscal year’s performance. At Friday’s closing price Apple is trading at 12.42x the Street’s current eps estimate for FY2019 with eps forecast to rise by nearly 12%.

    The current share price is not only a bargain for long-term investors, it’s also a bargain for Apple. At this time for Apple, conventional wisdom simply doesn’t apply.

    8
    December 15, 2018
    • Fred Stein said:

      Thanks for the complete view on iPhone durability and commensurate increasing installed base. Tim Cook mentioned at last earning call that the entire IB grew 20% last year. That may include watches and AirPods, which is fine. Apple is nearly 40 years. So IB growth of 20% annually is phenomenal.

      Apple appears to be increasing sales of refurbished iPhones. Just last month, they starting selling refurbed models on-line. While this may hurt GM % a tiny bit, competing this 234M unit market has two advantages:
      1) Build relationships with new budget minded customers.
      2) It is, modestly accusative. And more so, if they sell extended warranty plans

      0
      December 15, 2018
      • Gregg Thurman said:

        While this may hurt GM % a tiny bit

        I don’t think it does/will. I believe Apple is actively involved (going so far as to create more pre-owned iPhones with its annual trade-in purchase agreement) in creating a larger installed base using pre-owned iPhones, and the cost of doing this is built into the price of new iPhones.

        Apple has been doing this for more than a couple of years, and yet GM% has remained remarkably constant at about 39.5% since FY2009 (9 years).

        1
        December 15, 2018
      • Gregg Thurman said:

        JP Morgan shows actual installed base growth as follows:

        2017 124 Million units
        2018 121 Million units
        2019e 84 Million units
        2020e 96 Million units
        2021e 97 Million units

        JP Morgan sees installed base growth rate dipping significantly during 2019, returning to a new “normal” in 2020 and beyond. I think the cause is directly attributable to the iPhone X price increase, which by 2020 will be $200 lower than cost new.

        1
        December 15, 2018
      • Robert Paul Leitao said:

        Fred:

        Good find. The installed base of iPhone users is expanding at a rapid pace. This is why I believe it’s best for Apple to focus on delivering the most advanced handsets possible rather than attempting to boost unit sales at lower price tiers when demand for lower-cost iPhones is being met through the market for pre-owned iPhones.

        A robust market for pre-owned iPhones supports Apple’s higher iPhone ASPs on new handsets and allows the company to invest heavily in innovation which in turn advances the eco-system by providing developers with opportunities to take advantage of the capabilities of the latest handsets.

        Apple isn’t interested in selling the most iPhones. The company is interested in selling the best and most advanced handsets possible. The quality of the handsets keeps the devices in service for years.

        As I said, conventional metrics to gauge the company’s success are now antiquated.

        0
        December 16, 2018
    • Gregg Thurman said:

      At this time for Apple, conventional wisdom simply doesn’t apply.

      Jobs was anything but conventional. He created and rebuilt a company that was anything but conventional.

      The only thing conventional about Apple/AAPL is WS analyst coverage, who just can’t seem to get their collective arms (with a few exceptions) around this Company.

      2
      December 15, 2018
  3. Robert McDonald said:

    Thanks everyone for some sane commentary on Apple.

    4
    December 15, 2018
    • victor castroll said:

      why sane? cause it’s all bullish?

      0
      December 16, 2018
      • Peter Kropf said:

        “why sane? cause it’s all bullish?”

        There’s a difference between FA and TA and you pretend not to know the difference.

        I find some of your comments informative, but clearly, this one is just trolling.

        Why not put some work into setting your case out clearly? Conviction Hold vs Trading, Market Sentiment vs Business Excellence, Android’s “live for the day” vs Apple’s move to Permanent Protected Lifespan.

        1
        December 16, 2018
        • victor castroll said:

          um, clearly you missed my friend of blog article a couple weeks back.

          and no, i wasn’t trolling. just trying to break up the myopic kool-aid lovefest

          “Why not put some work into setting your case out clearly? Conviction Hold vs Trading, Market Sentiment vs Business Excellence, Android’s “live for the day” vs Apple’s move to Permanent Protected Lifespan.”

          #why?

          0
          December 16, 2018

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