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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.
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:
- At least one sustainable competitive advantage.
- Dominant in its given industry.
- Dominant for more than a decade.
- Strong free cash flow.
- Efficient working capital management.
- Sales above $4 billion per year and growing revenue at 10%-plus rates.
- Best-in-class management.
- High return on invested capital.
- Strong balance sheet.
- 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:
|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.
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."
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.