Understanding Apple – Apple as Gillette

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

Apple (NASDAQ: AAPL)  and Procter & Gamble (NYSE: PG) – what do they have in common?

In a November 2 report by Jefferson Research, PG is given a Buy rating, stating:

  • PROCTER & GAMBLE CO is showing strong Earnings Quality, Cash Flow Quality, Operating Efficiency and Balance Sheet Quality, and Valuation suggests a lower amount of price risk.  When combined, PG deserves a BUY rating.

They further note that the greatest recent growth was in the Cash Flow Quality rating.

Cash Flow – herein lies my point.

The venerable PG makes its living by selling consumables. Your razor gets dull, if you wanna shave, then you definitely need to replace. CASH FLOW!

Apple, on the other hand, makes expensive electronic gadgets. Their computers in particular represent pretty much the top of the line in their class. Even the new iPad mini is priced 50% above others in its size class. So what does it have in common with PG?

The iPhone represented about 46% of Apple revenue in the past quarter (FQ4-2012). A fairly major expense at $200 to purchase with a plan, a new model will cost $600 or more if purchased before a plan is completed. This is a bit more than a pack of razor blades or a bottle of shampoo.

Yet the fact remains, People DO replace their iPhones on a regular basis. While I have not seen detailed figures, I would guess that, at least in the USA, the average upgrade cycle is something under 2 years as many buy each new upgrade. Apple has sold over 200 million iPhones, and continues to sell at over 25 million per quarter. So, while they may not all still be in circulation, it is clear that the iconic smartphone will soon reach a user base of 250-300 million. This means that there will be (assuming that in other countries the rate is lower) about 100 million replacement buyers per year. Then add to that the new buyers.

Canaccord Genuity technology analyst Michael Walkley recently predicted that Apple will sell almost 200 million iPhones in 2013. This pretty much validates the my point.

This is how Apple is becoming the high-tech Gillette.

Conclusion

The sales of iPhones does not approach the scores of billions of razor blades sold per year. It does, however, like the blades, exhibit a fairly high replacement cycle, and so provide Apple with a very stable long term cash flow.

Something to think about when evaluating the stock.

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Related Article: Chromebook vs. iPad.

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Malcolm Manness has a Masters degree in Computer Science, and worked for 14 years in development, technical publications and software quality assurance. He has been investing for 20 years. Currently, he does writing, and FileMaker Pro programming on contract.

His short fiction can be found (under pseudonym J. Seunnasepp) at http://50centflash.com/.

 

==== Understanding Apple series

You may love Apple and their products, or hate them to the core, but you cannot deny that Apple now has the highest market cap of any company, their products are trend setters, and currently they are trading at rather low multiples, especially regarding forward earnings.

Warren Buffet has the maxim: “Invest in what you know!” So, for those who want a unique perspective on Apple’s success, I have a series of articles Understanding Apple. I hope you will find them helpful and provocative.

Let me know what you think.

 


JaanS owns shares of Apple. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and The Procter & Gamble Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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