Who's Protecting Apple?

By Keith Speights - May 4, 2012 | Tickers: AAPL, GLW, LQMT.PK, ZAGG | 0 Comments

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I watched the 2009 movie The Blind Side again on cable recently. The movie begins with Sandra Bullock’s voice as the video shows the career-ending hit Lawrence Taylor made on Redskins quarterback Joe Theismann. Bullock introduces the movie’s story by pointing out how the left tackle is usually the highest-paid position in the NFL after the quarterback because it protects the QB’s blind side. That makes sense. And it got me to wondering about a parallel in the investing world. I would argue that the QB of stocks in today’s market is Apple (NASDAQ: AAPL). But who’s protecting Apple? Are these protectors worthy of high valuation like the NFL linemen referred to in The Blind Side?

There are plenty of companies who are physically protecting Apple – at least Apple products. Many of these companies make covers and screen shields for iPhones, iPods and iPads. The most prominent publicly traded of these companies protecting Apple is ZAGG (NASDAQ: ZAGG).

The part of iPhones and iPads that needs the most protection is the screen. The company making the glass that protects the iPhone and iPad is Corning (NYSE: GLW).

Then there’s the possible future protector of the entire device - LiquidMetal. Apple has licensed LiquidMetal’s metal alloy technology for a few years now but has yet to roll out an iPhone or iPad incorporating a Liquidmetal casing.

Another Way to Play Apple?

Some commentators often mention investing in other companies that are part of the Apple ecosystem as a way to benefit from Apple’s tremendous growth at a lower cost than buying Apple shares. It seems reasonable to expect that if this premise is true that there would be a fairly high degree of correlation between the stock prices of Apple and the ecosystem company.

 The table above shows very weak to non-existent direct correlation between the stock price of Apple and its protector companies. As Apple goes up, these three stocks just might go down based on history.  I think we have to scratch the idea of tying the protectors’ stock prices to Apple’s valuation. Of course, that still doesn’t mean that these companies shouldn’t be highly valued. Let’s dig further.

Salary Negotiations

Determining what an NFL player is worth isn’t an exact science. Neither is determining what a company is worth. We’ll look at three values for each stock – median analyst 12-month price target, discounted cash flow (DCF) and 5-year expected price/earnings to growth (PEG) ratio.

For easier comparison, I have converted the figures into ratios for price/target, price/DCF and used the PEG as is since it is already a ratio.

Judging solely from these numbers and assuming a ratio of 1.0 as fair valuation, ZAGG does appear to have similar growth potential as Apple. Corning is similar to Apple on price/target and price/DCF but has a very high PEG. This high PEG stems from analysts projecting annual growth over the next 5 years of only 1.16%. LiquidMetal looks attractively valued based on the price/target metric but does not have values for the other ratios due to negative cash flow and earnings growth.

Draft Day

The Blind Side ends with actual footage of Michael Oher being picked in the first round by the Baltimore Ravens on NFL draft day. Are any of our protectors worthy of a high draft pick?

I wouldn’t recommend selecting LiquidMetal. First, it is a penny stock. I only have two things to say about penny stocks:  (1) Stay Away and (2) Stay Far Away. Second, the company’s association with Apple won’t really benefit it going forward since Apple paid a one-time fee two years ago for a perpetual (and exclusive) license. Third, LiquidMetal is bleeding money fast.

Corning remains somewhat of an enigma. The company has a solid balance sheet and a low P/E ratio. It is a strong competitor supplying glass for the LCD, tablet, cell phone, optical fiber and life sciences markets. Yet Corning shows anemic growth in earnings and in shareholder equity.  I want to like Corning as an investment alternative, but my gut instinct says let this pick go to another team.

That leaves us with ZAGG. The company just announced 106% growth in revenues and 92% increase in profit margins compared to first quarter last year. It has improving cash flow and is decreasing its debt level. ZAGG’s return on equity for last year was a healthy 25.9%.

The stock plummeted prior to its earnings release on May 3^rd by over 14% but recovered some and was down by 7.66% at the close. Why? Apparently ZAGG fell because a blogger talked with 5 stores, observed one store for an hour and then concluded that ZAGG is falsifying revenues because these stores’ figures didn’t match ZAGG’s officially reported revenues. (No, I’m not making this up.) Despite this roller coaster ride, ZAGG appears to be healthy and very attractively priced.

ZAGG could face headwinds in the future if Apple comes out with a totally scratch-resistant glass. In that event, my assessment of Corning would change radically (assuming, of course, that the glass was made by Corning.)  But that’s an “if”. For now, based on the current facts my draft selection is ZAGG. And I’m still cheering for the quarterback, too.

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