Streetwise for Sunday, May 7, 2017

Given the many facets of uncertainty facing the financial markets, does Wall Street still make sense? Absolutely. The opportunities to invest in the shares of quality companies are abundant in any economic or financial environment.

However, to seize the moment requires a willingness to make decisions with prodigious confidence and the fortitude to stick to those decisions despite the entreaties of others.

At the same time, do not make your life unnecessarily difficult. Combine determination with a sense of confidence and you will be successful. Or to quote George Zimmer, founder and former CEO of the Men’s Wearhouse, “I guarantee it.”

Consider Apple (AAPL). I cannot recall when I have had so many phone calls and email messages asking whether this is the time to buy, hold or sell Apple’s shares. Moreover, perusing a variety of news and financial websites brings forth a cornucopia of bullish articles on the company as well as comparable number of bearish ones. The confusion is no surprise.

Let’s cut through the Gordian knot. There are approximately 47 analysts who write about Apple, of which 35 have a “buy” recommendation, while 10 have a “hold.” Meaning that there is a 75 percent majority who feel Apple presents a buying opportunity.

Moreover, the mean share price estimate for Apple from among 41 analysts is $149 with the shares recently trading at $147.51. So, is there potential for significant future gains? I believe answer is yes, although many might not agree.

Apple reported a surprise fall in iPhone sales for its second quarter, indicating that customers may have held back in anticipation of the 10th-anniversary edition of the iPhone to be released later this year.

Under pressure from shareholders to return more of its $250 billion-plus cash hoard, Apple raised its capital return program by $50 billion, increased its share repurchase authorization by $35 billion and raised its quarterly dividend by 10.5 percent.

For its fiscal second quarter ended April 1, Apple sold 50.76 million iPhones. That was down from 51.19 million a year earlier. The Street had expected iPhone sales of 52.27 million, according to FactSet, while iPhone revenues rose 1.2 percent during the quarter, due in part to a higher average selling price.

For the second quarter, the company’s net income rose to $11.03 billion, or $2.10 per share, compared with $10.52 billion, or $1.90 per share, a year earlier. Analysts on average had expected $2.02 per share, according to Thomson Reuters I/B/E/S. Revenue rose 4.6 percent to $52.90 billion in the quarter, compared with analysts’ average estimate of $53.02 billion.

The company forecast total revenue of between $43.5 billion and $45.5 billion for the current (fiscal third) quarter, while analysts on average are expecting $45.57 billion, according to Thomson Reuters I/B/E/S.

Apple’s gross margin hit 38.9 percent, slightly ahead of analysts’ average expectation of 38.7 percent, despite higher prices for memory chips. The company said it expects gross margins next quarter between 37.5 percent and 38.5 percent, versus analysts’ expectation of 38.3 percent, according to FactSet.

Yet, expectations are rising ahead of Apple’s 10th-anniversary iPhone release this fall, with the expectation that the launch will help bolster sales. Apple typically launches its new iPhones in September.

A big jump in sales usually follows in the holiday quarter, before demand tapers over the next few quarters as customers hold back ahead of the next launch. Apple’s 10th-anniversary iPhone range might sport features such as wireless charging, 3-D facial recognition and a curved display.

The intrinsic value of the shares, using the ValuePro discounted free cash flow to the firm model with corrected numbers, is $164.67. My fiscal 2017 earnings estimate is $8.90 per share, with the share price likely to appreciate to $160 over the next 12 months. Given the potential for record sales of the next generation products out this fall, I would not be surprised if my numbers are conservative.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.


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