Valuentum Exclusive Analysis for the Discerning Investor

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On Tuesday, Apple (AAPL) posted excellent first-quarter results by almost every measure. The iPad-maker had its highest quarterly revenue and earnings ever and set all-time records for iPhone, iPad, and Mac sales. The performance also relieved some concerns regarding the leadership transition to new Apple CEO Tim Cook following the passing of legendary innovator Steve Jobs. Though we continue to hold the firm in the portfolio of our Best Ideas Newsletter, we may look to trim our position and take some profits in coming weeks. Our above-market fair value estimate for Apple remains unchanged.

The company blew by consensus expectations pretty much across the board: revenue ($46.33 billion), gross margin (44.7%), and earnings per share ($13.87). Apple sold a whopping 37+ million iPhones during the quarter (up 128%), 15.43 million iPads during the period (up 111%), and 5.2 million Macs during the quarter (up 26%). The firm also sold 15.4 million iPods, which represented the only unit decline at 21%. However, the slide in iPod sales was expected as consumers continue to migrate to other Apple products that can play music. 

Looking ahead, the firm still has a long runway of growth with its iPhone and iPad platforms in both the consumer and enterprise spaces. Yet, Apple offered fairly conservative guidance, but even such conservatism still was better than consensus expectations. The iPhone-maker thinks it will hit $32.5 billion in sales in its fiscal second-quarter and earn about $8.50 per share during the period. We think investors will be expecting another huge beat in the quarter, so the likelihood of a missing the “whisper” number is heightened.

That said, we continue to believe that Apple represents one of the best undervalued, growth stocks with attractive technicals on the market today (the crème de la crème of Valuentum investing). After combining cash and marketable securities on its balance sheet, Apple has an impressive $97.6 billion on hand (over $100 per share) – that’s bigger than the market capitalizations of the vast majority of firms in the S&P 500! And here’s what Apple had to say about potential uses of such cash. From its conference call:

“we're examining all uses of our cash balance, what we might do in the supply chain, what we can do from an acquisition perspective and otherwise. Since I don't have any perspective to share with you today, specifically on dividends or buybacks, other than again, we are actively discussing the cash balance. And in the meantime, we're not letting it burn a hole in our pockets.”

We wouldn’t be surprised to see Apple in coming periods initiate a dividend, launch a massive share buy-back program or engage in an acquisition that furthers vertical integration to improve overall product gross margins. 

Suppliers for your watch list: TriQuint Semi (TQNT), Cirrus Logic (CRUS), QUALCOMM (QCOM), Nuance Communications (NUAN)

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