I place Apple in the category of iconic growth stocks covering the past 50 to 60 years. The list is short. It starts with Polaroid, IBM and Xerox that had meteoric runs of a decade or more. In the early seventies one decision growthies like Avon Products, Merck, Coca-Cola, Procter & Gamble, Walt Disney, Schlumberger, even Sears, Roebuck made the list of 10 largest holdings of institutional investors, particularly the Morgan Guaranty Trust portfolio.
Even in 1972, Polaroid sold at 90 times earnings, a 400% premium to the market. Sears, Roebuck at 30 times earnings was a comparative bargain. Let's not forget Microsoft's awesome performance, and over the past decade Google, Facebook and Amazon's primacy.
The takeaway is nothing lasts forever. Academics rightly point out that the average lifespan for a growthie is 5 years. Only a handful hold their primacy for a decade or more. Polaroid flamed out. Xerox ended up buying a brokerage house. The Watsons called in an outsider, Lou Gerstner to reorganize the structure and tiers of management at IBM.
My interest in Apple goes back to their intro of the iPod. Was the stock in the twenties then? My partner and I quickly concluded that the iPod was a superior music delivery system to Sony's Walkman and Sony retained 600 million users. We concluded the Walkman was toast and extrapolated heady numbers for Apple.
Later, we evaluated Apple's computer which sold at the high end, solid niche product, but couldn’t put away Hewlett-Packard and Dell. This was the correct call. The meteoric trajectory for Apple began in 2010 at an adjusted price of $20 a share, based on its introduction of the iPhone. At its peak Apple went around the clock more than 5 times. But we're now talking about a correction of some magnitude, namely 30%.
Carl Icahn probably topped out Apple with his noisy acquisition of a 1% holding and afterward his pronouncement that Apple was headed to $250. Luck and pesetas, Carl.
What concerns me is Apple's snappy correction came about despite all the bullish pronouncements from dozens of serious securities analysts following the company with maximum intensity. Even after its flattish earnings report and management’s frankly sober assessment of its near term future, the bullish consensus holds together. Nobody cared to throw their files into the waste basket.
Consider the following analyst pronouncements: FBR Capital Markets focused on the iPhone 7 later this year as Apple's growth impetus. They lowered their price target from $150 to $130. Cowen saw downside to only $90 a share, a relatively safe investment. Stifel cut its target to $120 from $140 but maintains its buy despite adjusting its earnings projections lower.
Meanwhile, Piper Jaffray lowered their Apple target to $172 from $179. (Is this insanity?) Morgan Stanley reiterated an overweight rating although lowered fiscal ‘16 earnings from $9.50 to $9.00. Bernstein, a pure research house, maintains a price target of $135 while Goldman Sachs holds its buy with a 12-month $155 price target. They cite better than feared guidance.
If ever there was “groupthink” on Wall Street this is a prime example. Nobody wants to face clear indicators of market saturation of the worldwide iPhone market. Further, Apple's diversification and new product development outside telephony is long cycle in nature. A new version of its watch can't carry the company and the buildup in the recurrent revenue stream evolves slowly.
What investors have to work with is Apple's balance sheet and income statement, which is as powerful as it gets. From a liquidity standpoint Apple is a financial fortress with enormous free cash flow and a low multiple of enterprise value to free cash flow of 6.4 times. Many big capitalization stocks with growth prospects sell above 15 times free cash flow, Facebook, for example.
Apple's quarterly dividend is currently 52 cents a share. Assuming Apple falls into the no-to-minimal growth category comparable say with AT&T, Pfizer and Verizon Communications, it would need a 4% dividend yield to attract value and income biased shareholders.
Apple’s board should consider doubling the payout to $4 a share or at least 50% of annualized earnings. Chances are this action gets elongated over several years and doesn't provide any floor under the stock’s downward trajectory. Year-over-year the dividend was bumped just 10%.
Apple's cash boodle is another story. Net of long-term debt the number is $153 billion, but probably almost all this sum rests abroad and is taxable if repatriated. Let's give it a 25% tax haircut or $38 billion. We're left with $115 billion with annualized free cash flow running at a $58 billion rate, some $10 a share. This is serious money practically equivalent to net earnings.
Unlike an ethical drug house that spends up to 15% of revenues on R&D, Apple gets by with a budget running at a $10 billion clip on a $300 billion revenue base. Call it 3% of sales, a comparably low expenditure. Consider, if Apple hired 1,000 employees at $200,000 per capita to explore the development of an electric car or a driverless auto with great dashboard readout it would amount to $200 million. If Apple made a bid to buy Tesla Motors with a market capitalization near $35 billion, I'd sell the stock unless Elon Musk stayed in place.
The history of growth companies making great acquisitions or major diversification gambits is nearly entirely negative. Apple's board of directors should pound the table. Put a $4 a share dividend in place and buy back 25% of the stock tout de suite.
Apple is a wait ‘n’ see piece of paper, best underweighted.
Sosnoff’s new book “Master Class for Investors” is available on Amazon.com and Barnesandnoble.com.
Sosnoff owns personally and / or Atalanta Sosnoff Capital, LLC owns for clients the following investments cited in this commentary: Apple, Merck, Procter & Gamble, Walt Disney, Schlumberger, Microsoft, Google, Facebook, Amazon, Morgan Stanley, AT&T, Pfizer and Verizon Communications.
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