Multiple Reasons Why Apple Remains a Strong Buy

Naomi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At the close of business on July 23, 2013, Apple (NASDAQ: AAPL) reported itsQthird fiscal 2013 financial results. The result showed the company performed well for the quarter, beating analysts estimates for its earnings per share and the company’s revenue for the quarter.

Below is a bar chart showing Apple’s revenue over the past three fiscal third quarter periods.

<img alt="" src="http://g.fool.com/editorial/images/60813/image-1_1_large.jpg" />

The chart shows that there is a visible increase in the company’s revenues for the third quarter of the 2012 fiscal year, in comparison to third quarter fiscal year 2011. However, from third quarter of fiscal year 2012 to third quarter fiscal year 2013, the result became stable. The third quarter fiscal year 2013 revenues beat analysts’ estimate of $35.01 billion and placed the amount at the upper end of the management’s guided revenues of $33.5 billion to $35.5 billion.

The bar chart below shows the trend of the stock’s EPS over the past three fiscal third quarter periods. 

<img alt="" src="http://g.fool.com/editorial/images/60813/image-2_large.jpg" />

Apart from revenues and cash flow from operations, another important performance metric is Earnings Per Share (EPS_. The bar chart shows an increase in EPS for third quarter fiscal year 2012 in comparison to the result of third quarter fiscal year 2011. However, the figures saw a downtrend in third quarter of fiscal 2013. This was as a result of the decrease in net income which stood at $6.9 billion, a decrease of 21.8% in comparison to the net income of third quarter of fiscal 2012.

Even with the decrease, the reported EPS beat analysts’ estimates of $7.32 and considering that the company bought back stocks worth approximately $16 billion in the reported quarter, I would say the beat was mostly impacted by the buyback.

<img alt="" src="http://g.fool.com/editorial/images/60813/image-3_large.jpg" />

The next performance metric in focus is the company’s operating margin. The above chart shows that the company’s operating margin in third quarter fiscal 2011 and third quarter fiscal 2012 is essentially unchanged. However, it was a different story in third quarter fiscal 2013 as the operating margin took a downtrend. 

<img alt="" src="http://g.fool.com/editorial/images/60813/image-4_large.jpg" />

The above bar chart shows the company’s gross margin percentage over the past three fiscal third quarter periods. The gross margin for third quarter of fiscal 2013 is lower than that of third quarter of fiscal 2012 by approximately 6%. This is mostly impacted by the sell of higher mix of iPhones, made up of a higher percentage of discounted lower-end iPhone models which were mostly targeted towards the developing markets of Phillipines and India. This caused the average selling price to experience a decline of 4% YoY.

Now we shall take a look at the unit sales of Apple’s products over the last three fiscal third quarter periods. We shall start with the iPad. 

<img alt="" src="http://g.fool.com/editorial/images/60813/image-5_large.jpg" />

The chart shows a significant increase in the sales of iPad in the third quarter of fiscal 2012 with 17.04 million units sold in comparison to the third quarter of fiscal 2011 which recorded sales of 9.25 million units of iPad. It was a downtrend however in third quarter of fiscal 2013 as management reported sales of 14.62 million units, a 14.1% decline which is impacted mostly by lack of new models of the product. The average selling price was $436.07.

The iPhone is the next product in focus. The chart below shows the trend in sales of the iPhone in the last three fiscal third quarter periods.

<img alt="" src="http://g.fool.com/editorial/images/60813/image-6_large.jpg" />

The chart indicates that the sales of iPhone has been in an uptrend within the three fiscal third quarter periods in focus. Third quarter of fiscal 2011 recorded 20.34 million iPhones sold and by the same quarter of the following fiscal year, it increased to 26.03 and for the last reported third quarter of 2013, it was 31.24 million units sold. This exceeded analysts’ consensus estimate of 26 million units of iPhone sales in third quarter of fiscal 2013. Even with the smartphone market already saturated, a 20% growth was recorded in the sales of the iPhones. Although there was an increase in sales, the average selling price declined by over $30 in comparison to its average selling price of $613 in second quarter of fiscal 2013.

We now move down to Mac product line. Apple reported sales of 3.75 million units of Mac. Not only is the sales below analysts’ estimates, it is also below the sales rate of the first two fiscal third quarter periods being analyzed as the chart below shows.

<img alt="" src="http://g.fool.com/editorial/images/60813/image-7_large.jpg" />

The product’s (Mac) average selling price also declined by about $75 in comparison to the average selling price reported in second quarter of fiscal 2013. I believe that the overall decline in the PC industry hugely impacted the decline.

The last product in focus is the iPod. The chart below shows an accelerated decline in the product in the past three fiscal third quarter periods. The product’s average selling price also declined by over $10.

<img alt="" src="http://g.fool.com/editorial/images/60813/image-8_large.jpg" />

“Other revenues” segment report, which covers iTunes, accessories, and other items, was at $5.169 billion.

In the same vein, Baidu, Inc. (NASDAQ: BIDU) announced its second quarter fiscal 2013 earnings report on July 24, 2013. The company’s stock was trading below $90 but the day after the result was released, the stock experienced a high exceeding $130. It is currently trading at a little over $125.

The company’s reported revenue of $1.23 billion is a 43% increase in comparison to the same quarter of the previous fiscal year and also a beat in comparison to analyst estimates. The reported adjusted EPS of $1.22 is slightly above the mean analyst estimate of $1.21. This is a good time for investors who have been looking forward to high growth from Baidu.

Qualcomm (NASDAQ: QCOM) also reported its third quarter fiscal 2013 earnings on July 24, 2013. The company reported revenues of $6.24 billion, a 35% increase in comparison to the $4.63 billion reported in the same quarter of the previous fiscal year. The Non-GAAP EPS stood at $1.03, a 21% increase in comparison to the $0.85 reported in the same quarter of the previous fiscal year.

Within the reported quarter, the company’s management increased its stock repurchases, also paying attention to return of capital to investors. With huge growth opportunities in the use of 3G/4G devices, the company and investors alike stand to benefit more from coming quarters. 

Conclusion 

The major takeaway I have from Apple’s third quarter fiscal 2013 result is the lower Average Selling Price (ASP). With the average selling price of the iPhones on the lower side and the vigorous promotion of its older iPhones, the company has been able to increase its market share as far as the smartphone market is concerned, especially in new and emerging markets. Over the long term, it will greatly benefit the company. For me, Apple still remains a buy because with the planned launch of another cheaper iPhone targeted towards emerging markets, there are better days ahead in terms of increased sales and revenues.

With Baidu and Qualcomm in the picture, I would say it’s a season of good performance and commendable earnings report for these three companies in the Technology/Telecom industry. However, it is time the management of Baidu device means of curtailing its accelerating SG&A and costs associated with traffic acquisition. Reports show that the company’s SG&A rose 83.5% YoY in the reported quarter. Although the company's liquidity has decreased in comparison to the same quarter in the previous year, it remains extremely liquid and can tackle any financial obligations that might crop up in the near future. Baidu is a buy for me.

Qualcomm on its part is also a long-term buy. Even though the dividend is small, it has potentials of continued growth as shown by the over 18% increase in stockholders' equity for the reported quarter. Add this to the fact that in the most recent reported quarter, the company was not just able to grow both sales and income at a recommendable rate, it outpaced its peers in the industry. More so, the company is extremely liquid and in the reported quarter, it was also able to increase its liquidity in comparison to the same quarter of the previous year. It is a stock not to be found missing in your portfolio.


Naomi Warmate-Igwe has no position in any stocks mentioned. The Motley Fool recommends Apple and Baidu. The Motley Fool owns shares of Apple, Baidu, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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