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Apple trading at lower multiples then MSFT?

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question_3 January 21, 2014 (Chinavestor) Earnings are coming up for Apple Inc. (NASDAQ:AAPL) on January 27, 2014 and this is a good opportunity to assess what investors are looking for. First of all, Apple Inc. (NASDAQ:AAPL) has to convince investors that it is back at a sustainable revenue/earnings growth path. Growth of Apple Inc. (NASDAQ:AAPL) has been slowing as the following revenue/net income annual chart testifies. Given that Apple Inc. (NASDAQ:AAPL) is facing pressure from lower end products, its margins have been eroding in the last year. This is clearly demonstrated on the first chart where total revenues grew to $170.9 billion from $156.5 in 2012, yet net income fell from $41.7 billion in 2012 to $37.0 billion in 2013.

 

Going over to the right chart, AAPL Quarterly Data, it is obvious that quarterly revenue and profit show a lot more fluctuation due to business cycles. Good news is that Apple Inc. (NASDAQ:AAPL) inked a contract with China Mobile (NYSE:CHL) and now has access to the largest mobile carrier's subscribers. But investors shouldn't raise hopes too much because China's smartphone market is almost saturated. This is where Samsung has made a killing outselling any other cellphone maker by a wide margin.

Given that the current quarter will complete data for year 2013 as well, investors will have a chance to asses Apple Inc (NASDAQ:AAPL) annual growth as well.

AAPL_revern

Taking a look at the balance sheet, Apple Inc. (NASDAQ:AAPL) is a banner stock. There is just a tiny $16.9 billion long term debt compared to assets worth over $209 billion. In fact Apple Inc. (NASDAQ:AAPL) has cash and equivalents worth over $40 billion at hand today. Apple Inc. (NASDAQ:AAPL), like other tech companies, is basically not leveraged. The problem for AAPL is how to return value to shareholders.

AAPL_debtasset

Apple Inc. (NASDAQ:AAPL) has started to distribute profits in forms of dividend. Good news is that cash flows from operations continue to bring in plenty of juice. The company brought in $53.6 billion cash in the last 52 weeks from operations and the trend is growing. Apple Inc. (NASDAQ:AAPL) invested less in the last 52 weeks then in 2012 and that might change going forward. Needless to say, the company has a sound cash cow operation that just is phenomenal and is more than enough to fund capital expenditure needs.

When it comes to financing, Apple Inc. (NASDAQ:AAPL) paid over $10 billion dividends and bought back over $22 billion of its own shares. So AAPL is doing something like IBM (NYSE:IBM) does. Pays dividend and buys back its own shares.

AAPL_cashflows

Based on our analysis, it is clear that cash is not a problem for Apple Inc. (NASDAQ:AAPL). The company is also smart in returning value to investors. What investors are looking for going forward is higher margins or bigger sales volumes to increase profits. Now that China Mobile (NYSE:CHL) is wide open, increased sales in China looks a real possibility. Finally, market expectations run low for AAPL at the moment. The company is trading at 13.3 times earnings, in-line with companies like IBM (NYSE:IBM) and Cisco Systems (NASDAQ:CSCO). After a fantastic 2013 run, Microsoft (NASDAQ:MSFT) is trading 13.56 times earnings, higher than Apple. This I think creates opportunity for intelligent investors.



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