Category Archives: Apple

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Corporate Earnings of the S&P 500’s Top 10: Why It Is Important for You


  • Corporate earnings and fundamentals are variable, pick the stocks that best suit you.
  • There are low PE ratio stocks, high growth stocks, and high dividend yielders – anything you might want.
  • But be aware: some companies engage in buybacks that are detrimental to shareholders’ value.

Introduction

When you add up the top ten companies by weight, they account for 17.7% of the total weight of the S&P 500. For investors who are heavily invested in the S&P 500, following the earnings of its top ten companies is essential in order to understand the risks and rewards of being invested in the index. In this article we are going to assess the current market situation by looking at what has been going on with the 10 biggest companies in the S&P 500 index.

Apple

Apple (Nasdaq: AAPL) reported earnings after hours on Tuesday. Q2 2016 revenue declined 14.4% year-over-year and earnings per share declined 27% to $1.42 from $1.85. Those results were better than expected, and AAPL jumped 7% in after-hours trading.

AAPL isn’t a standard company, its revenue is highly dependent on iPhone sales which fell due to customers awaiting a new generation iPhone to be announced in September. If the same trend holds true as it has in the past with new iPhone generation sales, AAPL’s sales will increase when it releases the new phone. In the meantime, perhaps the most important thing from this earnings report is the fact that AAPL returned $13 billion to investors through dividends and repurchases.

The dividend yield is 2.38% annually but when we add in the repurchases, it comes to a staggering 2.3% quarterly yield, making AAPL’s dividend yield quite a bit higher than the S&P 500 average of 2.05%.

In total, the S&P 500 buybacks were $161 billion in Q1 2016,—interestingly, Apple alone makes up about 8% of this total— second only to Q3 2007 when the buybacks reached $172 billion. The most important thing with buybacks is the question: is buying your own stock the best use of cash at that point in time? Yes, companies protect and increase their share prices, but at what cost? We all know what happened in the two years after Q3 2007 when repurchases reached record highs…

Another company that is strong in repurchases in Microsoft (Nasdaq: MSFT).

Microsoft

MSFT also saw its revenue decline, by 6%, and earnings per share declined 23% (GAAP results), but nevertheless returned $2.8 billion in dividends and $3.6 billion in repurchases, giving a dividend yield of 2.54% and a 3.1% indirect yearly repurchase yield.

The decline in revenues and earnings further exacerbates the above mentioned buyback issue, but even more alarming is the fact that MSFT is buying its stock despite their PE ratio of 27.7, while AAPL’s is at 11. This is where alpha kicks in because good stock picking can make you avoid such bad cash investments.

Exxon Mobil

The consensus earnings per share for Exxon Mobil (NYSE: XOM) is $0.64 for Q2 2016 which is 34% below the earnings per share in the same quarter last year.

XOM’s share repurchase program is another crazy example of ill-timed purchases. In February, XOM stopped its buyback program after spending $210 billion over the last decade. The craziness lies in the fact that the company has stopped buying back stocks despite the price being at multiyear lows.

figure 1 xom buybacks
Figure 1: XOM’s stock price movement in the last 2 years. Source: Yahoo Finance.

This falls perfectly in line with what usually happens as managers time buybacks poorly. When stocks are cheap, management doesn’t buy them. When they are expensive, buybacks explode, eroding shareholders’ value.

figure 2 total buybacks
Figure 2: Quarterly share repurchases and number of companies repurchasing shares. Source: FACTSET.

Johnson & Johnson

Johnson & Johnson (NYSE: JNJ) is continuing on its wonderful ascent despite revenues and earnings per share not growing since 2014. JNJ has a $10 billion share repurchase program that is being financed by debt. The current enthusiasm is of course backed by global monetary easing which pushes future expectations higher.

General Electric

General Electric (NYSE: GE) has survived terrible times in the last 7 years. GE’s revenue is currently just 64% of its 2008 revenue, but the company finally managed to increase earnings and revenue in the last quarter. The PE ratio is still high at 24, and J.P. Morgan warns that GE will face bad times again due to the volatility in the economy and other internal issues.

Amazon and Facebook

Amazon (NASDAQ: AMZN) and Facebook (NASDAQ: FB) have the growth that the companies discussed above are missing, but it comes at crazy valuations.

AMZN’s PE ratio is 303, while FB’s PE ratio is 74.5. We cannot know if AMZN will manage to grow its earnings by more than tenfold in order to reach a more normal valuation or if it will forever stay the mega growth company.

Holding the S&P 500 gives you diversification, the unfortunately you gain exposure to companies after their initial growth cycle has passed. AMZN’s weight in the S&P 500 was only 0.46% in 2009 when its price was about a tenth of its current price.

Berkshire Hathaway

Berkshire Hathaway (NYSE: BRK.A, BRK.B) hasn’t yet release its earnings but what is significant and different from the above companies is that buybacks are limited. BRK will buy back its own stocks only if the price falls below 1.2 times book value. Warren Buffett believes that buying back the company’s own shares above book value is a disservice to shareholders. This might be one of the reasons why BRK has by far outperformed the S&P 500 in the last 30 years.

figure 3 brk vs sandp
Figure 3: BRK vs the S&P 500. Source: Yahoo Finance.

AT&T

AT&T (NYSE: T) doesn’t have comparable earnings as it recently acquired DirectTV, however it is a company that keeps on growing, has a high dividend yield of 4.53%, and has had minimal share repurchases when compared to other companies in the last 4 quarters.

JPMorgan Chase & Co

The last company on our list is JPMorgan Chase & Co (NYSE: JPM). JPM reported revenues up by 4% and net income up by 5%, and has a PE ratio of 10.87 with a price to book ratio of 1.0, making it the company with the best fundamentals on our list and a great introduction to our conclusion.

Conclusion

Most great investors would advise the average investor to hold the S&P 500 for the long term, but the analysis of the 10 companies we’ve discussed and the variety of their revenue growths, earnings, and management buyback policies suggest something different.

Being long the S&P 500 just because that’s what everyone else does means also having managers destroy shareholder value by excessive and poorly timed buybacks, or it means paying high valuations for companies with no growth or exorbitant valuations for growth companies. On top of that, the risks of just owning the S&P 500 are increasing as its valuation is higher and is at levels only seen twice historically, in the dotcom bubble and just before the 2009 crisis.

figure 4 s&P 500 pe ratio
Figure 4: S&P 500 PE ratio. Source: Quandl.

Investors should assess their own needs and financial requirements. There are plenty of relatively safe high dividend yielders on the market, value companies, growth companies and declining companies from which to build your portfolio.

 

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Global Smartphone Growth Isn’t Done Yet – Should You Invest?


  • The smartphone trend is bound to continue as 25% of the world has low penetration levels.
  • 2015 was stellar in growth so it is logical that 2016 will be somewhat slower.
  • Valuations are really cheap when compared to the general market.

Introduction

The smartphone industry is not only interesting because it includes the biggest company by market capitalization (Apple – NASDAQ: AAPL) but also because it is in a global growing trend and has low valuations. This article is going to provide an overview of the industry and its two biggest players.

Current Situation  

Global smartphone sales have been growing constantly in the several last years and this has been very rewarding for investors that invested in the industry at its beginnings.

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Figure 1: Global smartphone sales growth. Source: Statista.

But fears are increasing that this amazing growth story is about to stop as many estimates show slower growth of smartphones sales, and some even estimate a fall in 2016 based on the first ever smartphone shipments decline in Q1 2016. Global smartphone shipments fell 3 percent annually from 345.0 million units in Q1 2015 to 334.6 million in Q1 2016. Samsung is the market leader and shipped 79 million units in Q1 2016, a 4% decrease, while Apple shipped 51 million units, a 16% decrease in relation to Q1 2015. The third player in the market is Huawei, an employee-owned Chinese manufacturer that grew its market share from 5% in 2015 to 8% at the begin of 2016.

Even with the current stall in growth the numbers still look stellar and the we cannot say that the industry is finished just by one declining quarter. Especially after Q1 2015 was 21.5% better than Q1 2014 due to the new iPhone and Galaxy smartphones, so that was tough to beat. In general, the industry is expected to continue on its growth trajectory and only stall in 2018.

2 global outlook
Figure 2: Smartphone sales outlook. Source: Statista.

But the above data seems pessimistic when we know that current global smartphone penetration is at 50% and is expected to grow to 60% in 2020 according to the Mobile Economy Monitor. Developing countries like Indonesia and Brazil have penetration rates below 25%, and India has a smartphone penetration rate of only 13%. The three countries together represent 24% of the global population, so there is plenty of room still to grow.

3 figure penatration
Figure 3: smartphone penetration levels. Source: smsglobal.

Industry Valuation

Now that a trend has been identified, let us see what the valuations are in the business in order to estimate the risk and rewards of a potential investment.

As the smartphone market is very fragmented we are going to analyze the two biggest players which should give an indication for investors willing to dig into the multitude of smaller smartphone producers in order to find the new Apple.

4 figure market share
Figure 4: Smartphone market share. Source: Statista.

Huawei will be left out as you can only invest in it if you are an employee and you work for the company in China. Good luck with that.

Samsung has 24% of smartphone market share but is not a purely mobile company. Consumer electronics, Device Solutions and Display panels account for 46% of revenue, while 54% comes from selling mobile devices. Samsung has witnessed declining revenues in the past 3 years as their other segments find it difficult to compete, but mobile growth keeps revenue at a high level of 200 trillion Korean Won or $173 billion. EPS are $118 and the share price is $1,050 which gives a PE ratio of 8.9, a price to book value of 0.9 and a dividend yield of 1.7%. As Samsung is a global company, investors do not have to be concerned about the Samsung’s reporting currency. Samsung has no long term debt.

Apple has a market share of 15% and mobile devices represent 65% of total sales. Apple has also witnessed its revenue decline in this decade due to seasonal effects and the difficulty in topping the iPhone 6 sales boom of 2015. This decline brought the share price down to the current $98.94 that gives a PE ratio of 11, price to book value of 4.2 and a dividend yield of 2.2%. Unlike Samsung, Apple has 35% of its assets financed by long term liabilities and 90% of its cash hoarded abroad.

Conclusion

The goal of this article was to give an overview of the smartphone industry and not to give investment advice. Much more research is needed to accurately grasp the risks and rewards from an investment in the industry, and in depth analysis is needed to find the next success stories in the sea of new small players. But, the analysis of the two biggest players shows that their valuations are relatively low in comparison to the general market, especially when we know that 2015 was an explosive year with 21% growth and it is logical that it will be difficult to top in 2016. This pause in growth has created large fears in the market and brought valuations down. The low valuations in correlation to the long term upward trend represent an interesting investment opportunity.