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The Apple Blowout

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Apple is one of the two largest American corporations by market capitalization — depending on the day, it either leads or trails ExxonMobil. But even that momentous fact may understate its impact on our economy. Apple’s earnings report was the most heavily anticipated of the current earnings season. For one thing, Apple had fallen a bit short of the Wall Street estimates in its previous report. For another, this would be the first quarter in over a decade in which Apple was run by someone other than the visionary company founder Steve Jobs.

As you probably know, Apple blew Wall Street’s doors off. On Tuesday the electronics behemoth announced record-breaking profits for the fourth quarter of 2011: Its more than $13 billion in net earnings was not only the largest ever for Apple, but the second-largest ever by any American corporation. (Exxon reported a larger quarterly profit back in 2008.)

That means Apple’s profit was as large as its revenue from the fourth quarter of 2010, little more than a year ago. On top of that, Apple not only doubled its profits from the year earlier, it beat the analysts’ estimates by a whopping $7 billion, which is also a record. How big of an impact did that have? That growth was enough to catapult the earnings for the entire S&P 500 into the black. Prior to Apple’s earnings report, earnings for the S&P 500 as a whole were down 4.2 percent in the fourth quarter. But after Apple’s report, the net for the entire S&P 500 is now up 4.4 percent. For all that, Apple’s share price rose just 6 percent in trading on the day after the announcement, reaching a record high of $454.45. The record-breaking quarter has served to spotlight the fact that, in many respects, Apple’s share price may be too low. As of today Apple is trading with a price/earnings ratio of around 16; for comparison the entire S&P 500 is trading with a PE ratio of closer to 22.

Consider that before the earnings report, the 45 Wall Street analysts who follow the company estimated that, on average, Apple should be worth about $556 per share. It was trading at $100 less than it “should” have, even before blowing past Wall Street’s earnings estimates. With the new earnings reports, many analysts have revised their valuations upward to the mid-600s, leaving Apple trading at nearly a 50 percent discount. 

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Why that should be is a fairly knotty problem. One aspect may be that investors are wary of the company’s future after the death of Steve Jobs last October. Jobs was so inextricably linked to Apple’s image – and the company certainly foundered for the period from 1985 to 1997, when Jobs was not affiliated with Apple – that it might be wise to wait and see what kind of direction the company takes without him. Will new product development be as visionary as it was under Jobs? Will the exacting design standards continue to live up to Jobs’ vision? It’s too early to tell. 

There’s another issue at play, though, one that goes more directly to the value of the company. That is the nearly $100 billion in cash or cash equivalents that Apple is sitting on. How much money is that?

  • Apple could offer a $100 special dividend for every outstanding share. Not every shareholder, but every share.
  • Apple could potentially buy out Facebook, which is expected to reach a valuation of around $100 billion in its IPO.
  • There are only 52 companies on the planet that are worth as much as Apple’s cash hoard.
  • Apple could buy up rival phonemakers Samsung, HTC, Nokia, RIM, LG, Motorola, and Sony Ericsson, all of which combined have a market cap equal to Apple’s cash holdings.

Apple has been keeping a ton of money sitting on the sidelines for a long time, without any dividends or acquisitions to show for it. Other than the fact of its existence, that cash has been of little use to either the corporation or its shareholders, even though it accounts for nearly a quarter of Apple’s entire valuation. Perhaps for that reason, investors seem to have discounted it when valuing the company.

New CEO Tim Cook acknowledged this week that he and the Apple board are considering ways to make use of that cash. A share buyback program would be one option, as would a healthy dividend payout. It will be interesting to see if there’s a scenario under which Apple spends some of its wealth and the move actually redounds to the benefit of the company, and ends up making it even more valuable than it was.