Monday, June 8, 1998

Apple Computer
(Nasdaq: AAPL)
Phone: 408-996-1010
Price (6/5/98): $26 7/8


Snow White. Adam. Eve. Investors. All of these had previously found more than indigestion after ingesting a piece of Apple. Pity the shareholders because there was no prince to awaken them from their painful slumber nor fig leaves to cover up their losses. Apple was that rare company with a recognizable brand name and a lagging share price over the last decade.

After years of fluctuating goals and revolving-door executives, Apple finally got what every good company strives for -- Jobs and Income. Steve Jobs, who revolutionized the computer industry when he founded Apple with Steve Wozniak, came back to Apple as interim CEO, and along with his return came two consecutive quarterly profit reports.

So shares of Apple, which had been trading as low as $12 3/4 at the start of the year, gradually harvested gains by the bushel. While some investors may have been unsure of Apple's recent strategy -- to weed out all of the national resellers except for CompUSA (NYSE: CPU) and to discontinue its clone Mac business -- profits spoke louder than words.


Cupertino, California-based Apple makes the Macintosh computers and operating systems. It also has interests in software including FileMaker (formerly Claris). On the horizon? Mac OS X, the latest operating system, and iMac, a new line of computers.


Income Statement
12-month sales: $6334 million
12-month income: ($115.0 million)*
12-month EPS: ($0.96)*
Profit Margin: N/A
Market Cap: $3440 million
(*Includes charges)

Balance Sheet
Cash: $1285 million
Current Assets: $3213 million
Current Liabilities: $1384 million
Long-term Debt: $953 million

Price-to-earnings: N/A
Price-to-sales: 0.54


Apple lost market share to IBM-compatible personal computers for years until finally adapting a similar clone-friendly strategy. But then it ditched the Mac clone makers. And after years of trying to establish a retail presence, it ditched Circuit City, Best Buy, and the other electronics retailers of the world. Why?

The answer lies in margins. At the expense of revenues, Apple sought to centralize its operations. By agreeing to set up Apple shops inside CompUSA stores, the company now finds itself with a willing partner. In contrast to the electronics superstore chains that were gradually trimming down Apple offerings, CompUSA now stocks more than 200 Apple SKUs. In cutting loose the clone manufacturers, the company centralized demand to Apple -- once again. Not that the decision was entirely of Apple's own volition. With Taiwan-based clone-maker Umax having lost $21 million on Mac production last year (and looking to lose another $12-15 million this year), breaking up was easy to do.

Now Apple has a more direct influence on its own fiscal performance and can control costs more effectively. Streamlining the retail channels really isn't so heinous either. Consider, for example, that with just CompUSA, Apple has one more outlet than direct marketer success story Dell (Nasdaq: DELL).

So the strategies seem inherently sound today, even if it goes against the grain of what the company was trying to accomplish just a few years ago. Analysts now expect the company to earn $1.51 a share this year and $1.85 a share in fiscal 1999. But Apple's rise was not a complete surprise, and even if investors waited until the profitable December quarterly results to confirm that a turnaround was in place, one still could have bought Apple shares in the teens.


The G3 Macintosh line has been a large part of Apple's success. Its November introduction coincided with the company's return to profitability. The high-end computers are feverishly fast and come priced with high-margins for Apple. G3 now makes up barely more than half of total unit sales, but expect that to rise. When the OS X upgrade is released, it will be only for G3 machines. Users of older models will need to live with the current OS 8 version or trade up to a G3.

There is also the iMac. These slick monitor-encased units are expected to be big sellers in 1998, with pricing rumored to go below $1,000 by the end of the year. With the newly focused company back on the cutting edge, investors have definitely bought into the "Think Different" ad campaign and are once again attracted to the lure of Apple. Even Disney (NYSE: DIS) was a rumored buyer of the company recently. Apple is trading at just 15 times next year's earnings estimates and is selling for less than three times book value on a healthy balance sheet.

Unlike Commodore and Atari, two personal computer makers who have faded away, Apple is almost assured of solvency since it is the only company left separating Microsoft (Nasdaq: MSFT) from a true Department of Justice-angering monopoly. It is awfully nice to have your largest competitor rooting for you.

Yet, for the company that has killed off its Newton line of personal digital assistants (PDAs), the past has often been subjected to the cruel laws of gravity. This time around one has to wonder how long Jobs can remain "interim" CEO of Apple, shuttling between head gigs at Apple and computer animated film specialist Pixar (Nasdaq: PIXR). Under his watch, both companies have recently gone "to infinity and beyond," but here's hoping Jobs has a clear plan in place on the day when he ultimately must decide to choose one company over the other. Until then, Snow White is back and the shareholders, after years of being Grumpy, are Happy once again.

-Rick Aristotle Munarriz

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