Apple Q3 16A – High yield

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Apple as a bond is yielding 9.8%. 

• Apple reported better than expected Q3 16A results as the iPhone SE sold better than its predecessor, the iPhone 5c, despite a much larger than expected channel inventory reduction.
• Q3 16A revenues / EPS were $42.2bn / $1.42 compared to consensus at $42.1bn / $1.39.
• As usual all eyes were on the iPhone which shipped 44.4m units to end users compared to consensus at 39.9m but did so at a lower price as ASPs were $595 compared to consensus at $605.
• This is what was responsible for the better than expected results but iPad and Mac also fared reasonably well.
• iPad shipped 10.0m units compared to consensus of 9.1m and the iPad Pro helped ASPs improve to $490 from $415m.
• Mac shipped 4.3m units compared to consensus of 4.4m underscoring slow but steady market share gain in the PC market.
• Q3 16A Services revenues grew by 19% YoY to $6bn underscoring that developers are faring better on iOS and are increasingly preferring to develop their apps for this platform before considering Google Play.
• Guidance was also positive with Q4 16E revenues / gross margins expected at $45.5bn – $47.5bn ($46.5bn midpoint) / 37.5% – 38.0% (37.8% midpoint) slightly ahead of consensus at $45.8bn / 38.4%.
• These good results underpinned another very strong quarter of cash flow with $10.1bn generated from operations, $13bn returned to investors leaving gross cash down slightly at $231.5bn.
• With debt unchanged at $72bn this leaves the net cash position at $159.5bn.
• Although the market was clearly relieved that the declines were not as large as had been feared, these numbers do nothing to alleviate Apple’s current problem.
• In the eyes of the stock market, Apple has to produce growth in order to command a higher valuation and of this growth, there is no sign.
• This is why Apple is unlikely to receive a rerating of its shares until it branches out into a new product area.
• Apple Watch saw declines this quarter (see here) and I think that while Apple is building a car, it will never launch it (see here).
• This leaves Apple unlikely to see much in the way of growth but it is continuing to distance its ecosystem from Google’s.
• This gives me confidence that its superb profitability and cash flow are likely to remain intact for some time to come.
• On that basis, I like to think about Apple equity as a bond and on that basis it is currently paying a coupon to its owners at a run rate of $52bn per year.
• Hence, equity holders are earning a yield of 9.8% per annum with a very low risk profile.
• For those that are not worried about capital growth, this is a no brainer as most companies with bonds yielding 10% are highly distressed.