The Lure of the Apple

Investors in Apple Inc (Nasdaq: AAPL) have been richly rewarded in terms of capital appreciation. Listed on the Nasdaq Global Select (Nasdaq GS) exchange, Apple has delivered fabulous returns both in the short term and long term. It has consistently outperformed its benchmark 100 index. Its yield-to-date in 2012 works out to 60.40 per cent while the yield on the Nasdaq 100 during the same period is only 20.34 per cent.

It is hardly surprising that Apple generates more revenues and profits outside the US. Its international sales as a percentage of total sales have grown from 48 per cent in 2009 to 61 per cent in 2011, according to its annual report . The US, which represents the company’s largest market segment, contributed nearly 39 per cent to its net sales in 2011.

The company’s performance stands out on other parameters as well. Its operating income as a percentage of net sales has improved to 31 per cent in 2011 from 27 per cent in 2009. During the same period, return on net sales improved to 24 per cent from 19 per cent.

Its diluted earnings per share grew by almost 83 per cent in 2011 to $27.68 year-on-year and by 67 per cent to $15.15 in 2010. In the current year, analyst estimates suggest the company would report and EPS of $44.36 in the current year to September, 2012 and follow it up with an EPS of $53.30 next full year.

These estimates also reveal that the company’s revenues should grow to $156.59 billion in the year to September 2012 and $193.89 billion in the year to September 2013. This translates to a revenue growth of 45 per cent in 2012 and 24 per cent in 2013.

The company expects its gross margins to come under pressure in the next few years, according to its 10-K annual report for 2011 which clearly states:” The Company expects to experience decreases in its gross margin percentage in future periods, as compared to levels achieved during 2011, largely due to a higher mix of new and innovative products with flat or reduced pricing that have higher cost structures and deliver greater value to customers, and potential future component cost and other cost increases.” The company does not expect a repeat of lower commodity prices and component costs which resulted in pretty high gross profit margins of 39.4 per cent in 2010 and 40.5 per cent in 2011.

There are several things going in Apple’s favour in the medium term despite the bad press it received following its hasty launch of its Maps app which will be sorted out in the near future. The company has an excellent track record of innovative R & D which is being maintained at 2 per cent of its net sales. Moreover, the company manages its finances well as is evident from its almost $30.16 billion cash kitty which will see it through difficult times as the US and Europe struggle to revitalize their economies.