Since the last time we covered Apple in late November, the situation has changed dramatically, with new factors affecting our recommendation on the stock. Among others, we think that the recent appointment of a new CFO may be significantly relevant. Indeed, according to some analysts cited by the Wall Street Journal, Luca Maestri (the newly appointed Chief Financial Officer), is likely to give even more attention to shareholders than his predecessor Stephen Oppenheimer.
This would make some institutional shareholders happier: Carl Icahn still owns a significant portion of the shares and it is probable that he will restart to put pressure on the company for having more cash returned into shareholders’ pocket. A higher dividend-yield and a more aggressive buy-back could make the stock more interesting to those big investors. Mutual funds, instead, are constantly scaling back their long positions on Apple: a report from Morgan Stanley shows that institutional ownership reached a 5-year low in February 2014.
As in 2013, the stock is underperforming the benchmark also in 2014 and trades around $530 today, after plunging below $500 in late January due to the Q1 earnings release; the day after the release of the results, the stock tanked (-8%), shaving off more than $35 billion in market cap or $40 a share. Despite the fall, the stock had retraced quickly in the coming days, thanks to an interview released by Apple’s CEO, Tim Cook. He stated that, after the plunge, the company took advantage of the discounted price and bought back as much as $14 billion in common stocks, giving a boost to the buy-back programme.
Source: Bloomberg
This change in financial strategy happens in a delicate moment for the company: as we said, after disappointing quarterly results, investors dumped the stock, pushing the price lower. The actual figures actually beat the bottom-line expectations (EPS of $14.36 vs estimate of $12.68), but the guidance came out below analysts’ consensus: according to Reuters, the consensus for Q2 2014 revenue was $46 billion, while Cupertino announced it to be in the range of $42 – 44 billion. The company might have decided to set a lower guidance taking into account also the still uncertain global economic outlook and fierce competition: if that was the case, markets have now totally discounted it.
The key to understand how Apple is performing lies in Q2: the figures will full display for the first time the real impact of the long-awaited China Mobile deal and the overall expansion in Asia. Apple’s strategy to expand its sales in those markets has worked as a catalyst for the stock since the first rumours were released. Disappointing numbers from the Asian market would negatively affect the stock price.
Our belief is that Q2 data will not disappoint investors (having set the bar lower), and that the very recent change in the financial management may give new speculative appeal to the iPhone creator, becoming a driver in the medium-term. In particular, we rely on the fact that, as pressure from existing shareholders may re-increase, upside momentum will push the stock performance waiting for new indications about its cash management and retention policies (that could be announced by the end of April).
Apple is also expected to release a newer version of its iPhone with a bigger, sapphire (?) screen, later this summer. Users are beginning to feel more and more the need for a bigger display, and they will eventually be satisfied. A larger version of the iPhone could significantly help to boost sales and work as a catalyst for the stock; above all, it could help re-gaining market shares from the rival Samsung that released bigger smart-phones years ago.
In particular, Samsung just released a newer version of its flagship smart-phone, the Galaxy S5. Despite significant hardware improvements, they failed to impress consumers and the news of the release itself went almost unheard. Of course, we do not expect Apple to come back to its triple-digit growth only due to a larger iPhone, but investors, which are changing their perspective on Apple from a growth to a value company, would reward even a smaller increase.
Therefore, we conclude that Apple is still a good bet for the next months; moreover, new commercial and strategic agreements (like the one with Ferrari that was announced some days ago) help in holding the stock in the press headlines. Furthermore, the average target price is $590, with most analysts that seem to have positively reacted to the CFO change announcement.
Nonetheless, it is important to bear in mind that markets are beginning to be tired and need to consolidate: the general trend of the main indexes may influence the stock performance in the short-term. Indeed, even though there could be still limited upside potential in the next days, March may offer some discounts that would allow a better entrance on the stock, preparing it for a stronger upward trend in the months to come.
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