AAPL earnings growth and 1YRPEG

Investment Analysis Clubs Saul’s Investing Discussions
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AAPL is still my largest holding, even after substantially trimming it. While trying to decide how agressive to be with further trimming, I decided to look at earnings growth, P/E and TTM PEG (1YRPEG) so I could compare it to other possible investments.

The first time I tried this exercise, I forgot to adjust the older earnings for the 7:1 stock split. This led to some seriously wonky values, and apparent massive earnings shrinkage, which I knew couldn’t be true. After making the adjustments, I think the numbers are right, and they tell an interesting story.

Here are the last three and a half years of EPS:

         Q1      Q2      Q3      Q4
2015   $2.33
2014   $1.66   $1.28   $1.42   $3.06
2013   $1.44   $1.07   $1.18   $2.07
2012   $0.91   $1.11   $1.24   $1.97
2011                           $0.92

Apple is a cyclical business, with typically strong sales in the holiday quarter (calendar Q4), so it doesn’t seem to make sense to look at quarter-over-quarter earnings growth. But year-over-year does make sense:

         Q1      Q2      Q3      Q4
2015    40.36%
2014    15.16%  19.95%  20.34%  47.72%
2013    57.66%  -4.11%  -4.73%   5.00%
2012                           114.77%

Note how earnings were flat for most of 2013, then start to pick up steam in 2014, with significantly better growth in Q4 2014 and Q1 2015.

Here is the TTM earnings growth (trailing twelve months, compared to previous twelve months):

         Q1      Q2      Q3      Q4
2015    35.32%
2014    3.69%   8.24%  13.60%  28.82%
2013                   35.30%   9.95%

Below is the P/E, using the closing price on the day following the earnings release.

         Q1      Q2      Q3      Q4
2015   16.40
2014   14.15   15.70   15.93   15.54
2013   10.05   11.00   13.04   12.56
2012                   20.62   12.29

The P/E has been pretty steady for the last year, at around 16. It was depressed in 2013 while earnings growth was flat.

Finally, the TTM PEG (1YRPEG):

         Q1      Q2      Q3      Q4
2015    0.46
2014    3.83    1.90   1.17     0.54
2013                   0.37     1.26

Note that the stock price for Q1 2015 was $132.65, just a couple of dollars shy of the all-time high. With the price at close on Thursday ($125.26), the P/E would be 15.48, and the TTM PEG would be slightly lower at 0.44.

Back to my original question: how aggressive should I be at continuing to trim my position? Earnings growth (year over year) has picked up recently, above 40% the last two quarters. But the P/E has barely budged. If the earnings growth can continue in the 40% range (or even the 30% range), the stock seems attractively valued.

My marginal tax rate (federal plus state) for long-term capital gains is 35-36%. Given that I have a little better than a 3-bagger with my remaining shares, that means the taxes would be about 25% of the sales proceeds. If I sell and reinvest in something else, that something else has to grow its stock price about 33% plus whatever AAPL grows, just to break even. If the market doesn’t assign a higher P/E to AAPL, then I’d need 60-80% growth in the “something else” to break even (after taxes) in one year. If the market were to finally assign a higher P/E because of the increased earnings growth, then the replacement would need even better growth to break even in one year.

I think for now, I’m going to sit tight with my AAPL shares, and see if the earnings growth momentum continues. I’ve got some other positions that aren’t doing nearly as well, and I think I’ll sell them and redistribute to some of my good performers (SKX, SWKS, BOFI, CRTO).

-Mark

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With your tax rate, I would sit on it. (My long term tax rate is 15% so it’s less painful to take gains.)

Apple is a strong company and we don’t’ see trouble ahead. How big is it as your largest holding? More than 20% of port?? If it’s that big then maybe trim more for diversification.

Good luck!

Karen

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Mark, great work! I had reevaluating AAPL on my list of things to do today :slight_smile: One of the things I’m trying to decide is whether that capital makes more sense in SWKS at this point.

One minor thing for next time: Apple uses fiscal quarters, so initially I thought you hadn’t yet included their latest fiscal Q2 earnings. But it looks like you just presented calendar quarters instead, and did include them. But I think presenting the quarters the way the company does will make it easier to compare figures in general IMHO.

But overall, I get the same current numbers: growth rate of 35%, P/E 15.6, 1YPEG of 0.44 given the current price of $126.55.

The tricky thing about Apple is figuring out how much growth is left in their current categories versus how much new growth will need to come from new categories. What I like about SWKS is that they already have their fingers in a lot of pies, they will already benefit from any growth Apple has (as well as Samsung, various Chinese mobile companies, etc), and they also will benefit from the growth in many other industries. And they have a lot of visibility in what’s coming down the pike, so should offer more confidence about their estimates.

Neil
Long SWKS, AAPL

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You’re analysis is spot on.

Some time ago Saul posted to this board that he got out of AAPL (or wouldn’t buy into it - I don’t remember exactly) because he felt it was impossible for this behemoth to continue to grow. He felt that AAPL could not possibly double or triple and there were other more promising investments.

I too am long AAPL (not my largest position as you) and that post got me questioning this investment. Saul is so often correct that I pay a lot of attention to what he writes. But, I looked at the past performance of AAPL. At the time I was up about 80% over two years. I thought I don’t need a double or a triple, I was happy with any investment that could put on 40% a year, so I held my position. I didn’t do the tax calculation you did, but my current tax rate is very low due to 5-year averaging of a substantial charitable gift from my mother’s estate (it ends this year, after which I will have my mortgage paid off and a traditional IRA fully migrated to a Roth).

I’ve made some very good decisions recently due to the postings on this board. I am grateful to Saul and the many very smart contributors who post here. But don’t expect anyone to be 100% right 100% of the time. Quite recently Saul posted that he was wrong about AAPL, they have defied the odds and continued to grow at a handsome clip.

Standard disclaimer, past performance is not necessarily an indicator of future performance blah - blah - blah. But truth be known, past performance is actually one of the best indicators of future performance that we have. During the last conference call Tim Cook said it’s hard to find something not to like about AAPL’s numbers. That was not the immediate reaction of Wall Street, AAPL went down right after they reported, since then the stock has gone back and continues to go up. At a multiple of 16 and no end in sight for continued growth in sales along with a mountain of cash, much of it being returned to the investors I see no reason to exit this position.

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Quite recently Saul posted that he was wrong about AAPL, they have defied the odds and continued to grow at a handsome clip.

I’m one of these people that really wants to have a finger in every pie. Every time I see opportunity, I want a piece of it. One of the hardest things for me is keeping my portfolio from ballooning into dozens of companies. I’ve gotten a lot better at that over the past year, though, since Saul started this board.

I think one of the more valuable lessons for me is that it doesn’t matter how things perform that you don’t invest in – all that matter is what you do invest in.

Two companies have nice growth potential, one seems to have much better odds of it. So you buy that one, and both actually do well. Does that mean you made a mistake not buying the other? No. Your money is in a good performing company, and you made the choice that you believed carried less risk.

I think we all see companies from time to time that clearly have potential, but we pass on for one reason or another. As long as the company we do ultimately choose for that portion of our portfolio does well, it doesn’t matter that we passed on the others. And there may actually be an advantage to owning the one we like, since we may not be as skittish about it.

Anyway, as you’ve said, Saul makes mistakes (including with companies he does invest in – AEYE and KRED come to mind). Everyone should do their own research, make their own assessments, and come to their own independent conclusions about each opportunity. We’re all adults here :slight_smile:

Now I own AAPL, and have since 2004 or 2005, so I obviously stuck with it too :slight_smile: But I think it presents a lesson: even though AAPL has done better than Saul expected, his portfolio hasn’t been hurt by his decision to pass on it. It’s okay to pass on companies with potential if you’ve found other ones that you think have more potential or better odds of realizing their potential.

Neil
Long AAPL

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How big is it as your largest holding?

That’s slightly complicated. I’ve got one account that I have dedicated to mirroring the MF Pro portfolio (minus the AAPL shares, which I was massively overweight in at that time). Ignoring that account, AAPL is roughly 16% of the remaining portfolio. I work at Apple, and I’m lucky enough to have some stock grants that vest over time; if I do nothing, my share count would grow. Since I started trimming about 10 months ago, I have also been selling newly vested shares immediately.

My next largest positions (TSLA, CRTO, SWKS, FB, BOFI) are all about 5% of the non-Pro portfolio. I have only recently been building my SKX position; a large fraction of it is via options (a synthetic long), which means my total exposure to future moves is a little larger than TSLA & friends.

So far, I’m OK with the size of my AAPL position, given recent growth in earnings, and the tax implications of selling. My hope is to retire in the next 2-3 years (maybe sooner, if Mr. Market really cooperates). I would probably retire in November or December. Then in the following January, I could trim some more at a lower tax rate, and use that cash to build my 3 year cash cushion (for weathering bear markets with little to no selling of undervalued stocks).

-Mark

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Neil,
I totally agree. There are a lot of good investment opportunities (and a lot more crappy ones). I will never identify every one and get my money into is at just the right point in time.

I seldom review sold positions, and never look at them in order to figure out how I would have done had I not sold. The only time I look at something I sold is if I’m considering buying back in. I simply don’t care how I would have done because my decision was to sell. What am I going to gain by figuring out how I would have fared had I made a different decision.

In the words of Yogi Berra, “When you come to a fork in the road, take it.”

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I seldom review sold positions, and never look at them in order to figure out how I would have done had I not sold. The only time I look at something I sold is if I’m considering buying back in. I simply don’t care how I would have done because my decision was to sell.

Hi Brittlerock, That is EXACTLY how I feel and act. I can’t be in all the different stocks out there. There are plenty of good ones that I’ll never get in or have gotten out of. The only thing that matters is how the ones that I’m in are doing!

Saul