With or Without Jobs, Apple Is a Rule Maker

All markets have leaders. When it comes to smart mobile devices -- smartphones and tablets, notably -- Apple (Nasdaq: AAPL  ) leads, and not just numerically. The iEmpire has set the design standard for its key markets while playing kingmaker among a handful of partners. All want its favor; none its wrath.

All this and more is why I believe Apple is a Rule Maker.

Rule Maker?
First introduced in the David and Tom Gardner's 1999 book, Motley Fool's Rule Breakers, Rule Makers, Tom identified a Rule Maker as a dominant franchise that effectively sets the rules for the market it occupies.

"These are the heavyweights with broad smiles, wooden forearms, and their competitors' lunch money," Tom wrote at the time. "They're the companies that you know darn well will be around in ten years, probably inking masterpiece earnings reports while boxing the ears of any who would impede their growth."

Now, here's a full accounting of Rule Maker characteristics as Tom has them today:

  1. At least one sustainable competitive advantage.
  2. Dominant in its given industry.
  3. Dominant for more than a decade.
  4. Strong free cash flow.
  5. Efficient working capital management.
  6. Sales above $4 billion per year and growing revenue at 10%-plus rates.
  7. Best-in-class management.
  8. High return on invested capital.
  9. Strong balance sheet.
  10. A reasonable purchase or holding price.

I'll take a closer look at these attributes as they relate to Apple momentarily. First, let's look at some of the financial metrics from this list through a comparative lens. Here's a look at Apple versus its closest device-making peers, Dell (Nasdaq: DELL  ) and Taiwan's HTC:

Metric

Apple

Dell

HTC

Gross margin 39.8% 21.5% 29.5%
Levered free cash flow $21,474.4 million $2,981.8 million $2,083.3 million
Liabilities as a % of assets 35.0% 80.0% 68.0%
Total revenue $100,322.0 million $61,761.0 million $14,158.7 million
Revenue growth (3 yrs.) 48.2% (1.3%) 44.6%
Return on capital 33.9% 21.4% 58.0%
Net cash and investments $28,395.0 million $7,388.0 million $4,036.9 million
Trailing P/E ratio 15.43 8.00 11.25
Forward P/E ratio 12.68 8.00 Not available

Source: Capital IQ, a division of Standard & Poor's. All metrics are over the trailing 12 months, except where noted.

Behold, the king!
What I see when I look at these metrics is a picture-perfect Rule Maker. Let's review the numbers in context, using Tom's checklist as our guide.

At least one sustainable competitive advantage
Apple controls more than 60% of the tablet and digital download markets, and has done so well marketing the iPhone and its newer Mac models that Hewlett-Packard (NYSE: HPQ  ) -- the world's leading producer of PCs -- is giving up on consumer markets.

Dominant in its given industry
Read the last paragraph. Rinse. Repeat. Apple is dominating its given markets in ways reminiscent of Microsoft (Nasdaq: MSFT  ) before the feds filed an antitrust suit in the '90s.

Dominant for more than a decade
This one's more of a stretch since Apple first released the iPod in November 2001. But the near-decade since has been one of unparalleled prosperity for the Mac maker, to the point where Apple's bank account is bigger than Dell's market cap.

Financial outperformance
I'm grouping attributes 4-6 and 8-10 under this broad category since all the metrics are visible in the table above. Most striking to me: Apple is by far the largest company represented, yet also the fastest grower with the fattest margins and a barely noticeable valuation premium. Here, "Rule Maker" doesn't equal "mature." It just means dominant. Or, perhaps, "must-own."

Best-in-class management
Ah, the Big Question. Or is it? Mostly, I think Steve Jobs' departure is a red herring. Not only will he remain engaged as chairman, he's left the company with his guys. New CEO Tim Cook was Jobs' right hand. Designer Jonathan Ive created the iPod. Marketing under chief Phil Schiller put Microsoft on the defensive with the now-infamous "I'm a Mac" campaign. Apple's bench is deep.

The Foolish bottom line
We don't often use the term Rule Maker at Fool.com. Maybe that's because it's hard to become one, and those that do become kings are sometimes overthrown by princes. It was Microsoft, not Apple, that starred in Rule Breakers, Rule Makers as a model company.

Now, thanks to the iPhone and iPad, the roles have reversed. Nokia (NYSE: NOK  ) , Research In Motion (Nasdaq: RIMM  ) , and Motorola Mobility (NYSE: MMI  ) -- these former leaders have turned laggards at Apple's hands, casualties of the iEmpire's ascent to the throne. Long live the king!

Do you believe Apple is a Rule Maker? Why or why not? Please weigh in using the comments box below. You can also keep tabs on any of the stocks mentioned here using the My Watchlist tool. You'll get our latest analysis as soon as it's published.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Microsoft, Apple, and Research In Motion. Motley Fool newsletter services have recommended buying shares of Microsoft, Dell, and Apple, as well as creating a bull call spread position in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy is king of the world.


Read/Post Comments (6) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2011, at 3:51 PM, jdmeck wrote:

    They are the king. The only pad coming anywhere near the iPad is the one that looks just like an iPad. If Samsung remains a great company they will have Apple to thank.

  • Report this Comment On August 30, 2011, at 5:08 PM, iParadigm2watch wrote:

    Let's see. Products that customers want. Flawless execution. Ease of use. Unparalleled designe.

    Retail stores (no wholesalers), great customer service....what a concept!

    Me thinks this is a whopping good business plan!

    Gotta admire this company......own the stock?

    Even if the little guy can only afford 10 shares, it's a sound investment. Especially if one considers there may be another 1000% value added over the next

    few years or so......namaste'

  • Report this Comment On August 30, 2011, at 5:49 PM, Vercingtorax wrote:

    @iParadigm2watch... You are completely insane if you think that Apple will be worth 3.5 Trillion in a few short years. Not going to happen with out some sort of hyperinflation.

  • Report this Comment On August 30, 2011, at 8:04 PM, 1984macman wrote:

    Apple will come close to earnings for this fiscal year of $30. $500/share means a P/E of (500/30=) 16.7, not much above the current P/E of 15.4. Very conservatively, one can expect Apple to have a trillion dollar market cap by December 2013. If Apple just grows 50% a year from there, it'll double that by 2015, and double that to 4 trillion by December 2017, a little more than six years from now.

  • Report this Comment On August 31, 2011, at 11:07 AM, decbutt wrote:

    With or without Jobs ....

    We have seen Apple operate in both modes before.

    With Jobs: Industry leader. Successful.

    Without Jobs: Indistinguishable from the others. Not successful.

    Job left Apple to form NextStep in something like 1992-93. Apple lost its way.

    Jobs came back, Apple revived.

    CEOs (in competitive industries, such as IT) are like football coaches. The best coaches will drag their team to the top.

    Looking at the team, you see great players.

    But look at the same team a year after the coach has changed, and it is a different animal.

    People are fond of (and apt to) extrapolate recent performance into the distant future. But we have a direct precedent for this. Jobs left Apple before.

    That does not guarantee that Apple will lose its way again this time.

    But if you think it "can't happen" you should keep in mind that it already did happen once.

  • Report this Comment On September 01, 2011, at 8:10 AM, lucasmonger wrote:

    In response to decbutt...

    Jobs didn't leave, he was ousted before. And Apple was not successful at the time of his ousting. They were building the most user friendly and advanced computers on the planet, but people shied away from them because of their high cost and gravitated towards the less expensive alternatives (PCs). When Apple was run by people trying to make the Mac more PC-like (what was the difference between quadra, centris, and performa models? not much) apple had lost its way.

    The tables are turned this time. iPhone/iPod/iPad prices are competitive to the point that others are struggling to meet Apple's price points. Jobs has transformed Apple from a computer maker to a maker of an entire ecosystem that is unrivaled in the industry.

    Although I'm saddened by Steve's resignation, he leaves Apple running on all cylinders and it would take a Michael Dell or Steve Balmer at the helm to ruin it.

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