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Weekend Edition

Why Wall Street has it all wrong about Apple
Saturday, February 1, 2014

 One of the most popular blue-chip stocks in the world is getting hammered...
Consumer-electronics giant Apple has fallen 10% since the company reported earnings last week that disappointed investors.
 For the first fiscal quarter, Apple announced flat earnings of $13.1 billion. (Earnings per share were up 5% due to share repurchases.) Revenue grew 5.7% to $57.6 billion. Meanwhile, the company broke iPad and iPhone single-quarter sales records.
You may wonder why a company that reported record sales and grew its top line is being punished. Wall Street is all about expectations and predicting what a company will do every quarter. And Wall Street wanted Apple to sell more iPhones...
Apple reported it sold 51 million iPhones in the first quarter, up 7% from the same period a year ago. Analysts expected Apple to sell 55 million units. The company also said revenue in the current quarter could come in below analysts' expectations.
 Is Apple – which trades for less than six times earnings after subtracting its $155 billion cash hoard – really worth 10% less than before its announcement?
Billionaire investor Carl Icahn, who owned $3.6 billion of Apple stock before Tuesday, announced he purchased an additional $500 million of stock. Icahn disclosed his position through the social-networking website Twitter, adding, "My buying seems to be going neck-and-neck with Apple's buyback program, but [I] hope they win that race."
Icahn is urging the company to use its massive amount of cash to buy back more shares.
 Icahn also told CNBC's Scott Wapner that he has made a lot of money buying Apple shares on dips... and that Apple's announcement of new products in new markets within the year was bullish news for the stock.
 The main headline on Yahoo Finance this week read "New Apple Looks Like the Old Microsoft" – suggesting the company is stodgy and old. It's ridiculous...
In the November issue of Extreme Value, Dan Ferris raised his "buy up to" price on Apple. Here's what he wrote at the time...
Apple reported its financial results on Monday for its 2013 fiscal year, which ended on September 28. The Five Essential Financial Clues look better than ever.
Gushing Free Cash Flow
Apple gushed $45.5 billion of free cash flow last year, the most of any non-financial public company, according to data compiled by Bloomberg. That was on $170.9 billion in sales, a super-thick 26.6% free cash flow margin.
Shareholder Rewards: Dividends and Share Buybacks
Apple rewarded shareholders with an unprecedented 73% of free cash flow in dividends and share repurchases. (If you deduct the $17 billion in debt Apple took on to buy back shares, it used just 36% of free cash flow for dividends and buybacks. That's still a good showing.)
Apple has a share-repurchase authorization to buy back $60 billion in stock within three years. It has $24 billion left. It looks like it won't even take Apple two years to complete its share-repurchase plan.
Consistent Profit Margins
Apple's margins declined last year, but they were still thick. It had gross margins of 37.6%... operating margins of 28.7%... and net margins of 21.6%. Those are excellent numbers. Apple's products will likely continue to garner premium prices, resulting in consistently thick margins.
Financial Fortress Balance Sheet
Apple still has a gigantic financial fortress balance sheet. It has $146.8 billion in cash and securities and just under $17 billion in debt. That's more than eight and a half times more cash than debt. Apple will never have a financial problem as long as the balance sheet stays flush with cash.
Consistent Return on Equity
Apple earned 31% on starting shareholder equity last year. If you reduce its cash hoard by $100 billion or so, it would earn more than 200% on equity. This is a phenomenal business. It can't reinvest much capital at those enormous rates. Last year, capital spending was less than $8.2 billion. But every dollar it does reinvest is money extraordinarily well-spent.
Apple nails all the financial clues. It's a truly fantastic business. And right now, you can get it for an enterprise value of just 7.5 times free cash flow, compared with Microsoft's 10 times. That's a steal.
Apple might not do exactly what I want it to do. But so far, it doesn't contain the risk of making large, wasteful acquisitions. It has proven that it's a better capital allocator than Microsoft. And it's super-cheap right now. So I'm willing to raise our buy-up-to price.

 Dan e-mailed me last week to say there was "lots of good news" in Apple's announcement. He said the market's reaction was "silly."
He noted the bullish portions of Apple's conference call. Among them:
•   iPhone accounts for 69% of the smartphone market in Japan.
•   iPhone accounts for 41% of smartphone subscribers in the U.S., as of the three-month period ending in November.
•   iOS (Apple's operating system) devices already account for 57% of all mobile web browsing in China.
•   iPhone has a 59% share of the U.S. commercial smartphone market.
•   Apple sold 4.8 million Macs in the quarter, up from 4.1 million a year ago.

 Apple shares fell to less than $500 this week. It looks like we may be setting a floor in the stock.
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Last week, we launched our newest addition to the Stansberry Radio family... The James Altucher Show. And thanks to you, we currently hold the No. 1 spot for investing podcasts on iTunes.
James is an unusual character... He has made and lost his fortune several times. He has started dozens of businesses, doing everything from managing money to venture capitalism.
He's on the board of a company with $1 billion in annual revenue. His thoughts have been regularly featured in dozens of mainstream media outlets. And he's one of the best-connected people we've ever met. His Rolodex includes star athletes, celebrities, bestselling authors, and thought leaders.
We tried to convince James to work for Stansberry & Associates for nearly a year. We knew his unique perspective on life and business – coupled with his humility and candor – would be the perfect addition to the financial insight we already share with you.
He acted as the guest host for a handful of Stansberry Radio episodes. We featured his insight across our newsletters. We promoted his new book, Choose Yourself (which Porter said was "one of the most important books" he read last year).
 We launched The James Altucher Show to great success. For his first episode, James discussed the mainstream media and why you should always "ignore the crisis." He also interviewed bestselling author and entrepreneur Tucker Max.
You may not recognize the name, but Max is a wildly entertaining, brilliant businessman. He reinvented the book-publishing model. And to date, he has sold nearly 3 million books.
 For his second episode – out yesterday – James talked to author Gary Vaynerchuk. Vaynerchuk was an "F" student growing up. Today, he's a New York Times bestselling author... And he's reportedly worth more than $10 million.
 James already has several excellent guests lined up for his show (including Freakonomics co-author Stephen Dubner and New York Observer editor Ken Kurson, who formerly headed Rudy Giuliani's presidential campaign).
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Sean Goldsmith
Editor's note: The Weekend Edition is pulled from the daily S&A Digest. Our new James Altucher Show will feature the most controversial topics... the smartest and most successful guests... and the best business insight in the world. To sign up to receive these podcasts completely free of charge, click here and subscribe on iTunes.

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