<THE RULE MAKER PORTFOLIO>
An Apple Today
By Tom Gardner
ALEXANDRIA, VA (July 22, 1999) -- Hop in my Foolish time machine with me, and let's travel back eight years. It's the spring of 1991. And Apple Computer (Nasdaq: AAPL), 14 years after being incorporated, is the subject of rampant buyout rumors. The stock is on a rampage. Over the preceding six months, the price has doubled. Apple shares are trading hands at $72 a stub, and rumors are hounding the corporation that inspired the PC revolution.
Now check the stock chart for each succeeding year, and you'll find the sudden sharp rises of rumor followed consistently by pullbacks from the Newtonian gravity of bad business thinking:
From 1991 through late 1997, Apple was in increasing trouble. Put succinctly by your average 18-year-old millionaire computer programmer, "Apple sucked." Call it bad management. Call it failing to support their developers. Call it forgetting their core customers. Call it a ridiculous oversupply of new-product launches. Call it an inability to adapt and align its products with mass-market demand.
Call it what you will. But over that seven-year period, Apple shareholders beheld a horrible sight: the rotting away of their investment, from the inside out. Apple stock fell from $72 per share all the way down to $13 -- fully an 82% decline off its 1991 highs. That means Apple lost 82% of its value during a period in which the S&P 500 rose three times in value. Ouch. Worse still, toted up from its initial public offering in December of 1980 to its lows of 1997, Apple sadly had generated no value for its long-term owners.
On the financial statements, the fourth quarter of 1997 was another in a line of catastrophic reports. The company posted losses of $161 million for the three-month period, bringing net losses for the year to more than $1 billion. Bam! Sales had deteriorated a full 25% from the previous year. Kapow! Accounts receivable and inventory counts, down from outrageous heights, were still too high. Bif! And to top it off, Apple was now saddled with $951 million in debt. Pow!
Beyond the financial statements, Apple was in disarray. CEO Gil Amelio had resigned his post in July of 1997, leaving behind an unpatterned, scattered series of product launches and a company on the brink of destruction. The MacIntosh, Apple's signature product, was down to 3% of PC market share. And Steve Jobs, down to just one share of Apple ownership before its acquisition of his NeXT software business, was yet unwilling to formally grab the stem of the company and run it.
From every angle, in any light, Apple was a train wrecking, a Hollywood starlet drowning in whiskey and b-grade movies, a sandcastle pounded by surf, a corporation without internal controls.
At an industry conference for PC makers, Michael Dell called the company unsalvageable. Then, with Steve Jobs still searching for a CEO to run his endangered creation, the rumors hit that David Dorman, Executive VP of SBC Communications, had turned down an offer from Apple. (Dorman then went on to become President & CEO of PointCast, the push-technology broadcaster which snubbed a $450 million offer from News Corp. that year, only to be sold recently for just $4 million).
To cap it off, in November of 1997, Jobs was severely criticized for promoting a huge winter announcement, then offering "little more than news that Apple was opening an online site to sell its machines." A month later, an Apple spokesperson added to the disappointment, confessing that neither would Apple have a new CEO by the end of the year nor would it make good on hints that Apple would showcase a network computer at the MacWorld Expo in January. Jobs' famed ability to toy with reality for the benefit of Apple (i.e. marketing) was losing its mojo.
The stock dipped below $13. A ten-year low.
In this case, it was darkest right before the dawn.
There are few better places to lay the praise for Apple's sparkling turnaround than on the shoulders of Apple co-founder Steve Jobs. He landed a $150 million investment from Microsoft -- aligning the interests of two legendary competitors. He slashed 75% of all the initiatives at Apple, and focused the company on the development of the iMac. He re-introduced a fiery brand of leadership built on teamwork, ambition, and service. He brought life and order to a wounded and frantic organization.
Today, crack open the SEC filings on Apple's recent quarterly announcement, and you'll see that the past seven quarters at Apple have all been profitable. During that period, Apple's cash hoard has risen from $1.5 billion to $3.1 billion, even as Jobs has paid off more than $650 million of the company's debt. Apple has fought down its receivables, cleared out the inventory glut, and seen its stock rise 4.5x in value.
Yesterday's announcement of the iBook, a high-speed laptop with a networking twist, is a prime example of Apple focusing and re-doubling its efforts. The company's AirPort Card, enabling radio-wave connections between iBooks on a single Internet line, is a classic fit for designers, families, and schoolhouses -- the core of Apple's business since its birth. No one at Apple believes this turnaround is complete -- after all, the stock is still down 25% from its highs in 1991. But the momentum is clearly headed in the right direction.
If you're a Rule Maker investor, you're probably wondering how Apple stacks up against our standards. The company scores 43 points on the Ranker, meaning it's a very meaningful distance away from being a top tier Cisco, Intel, Microsoft or Yahoo!. That said, Apple is directionally on target and looking quite strong among the pack of PC makers. Click the link below to see the guts of Apple's business model and its comparison to Dell, Gateway and Compaq:
For further reading, check out the following:
Lastly, on the earnings front, Rule Maker holding Schering-Plough (NYSE: SGP) reported its second quarter financial results yesterday. The pharmaceutical maker turned in diluted earnings per share of $0.37, up 19% from a year-ago. Sales increased 15% year-over-year, thanks to strong sales of antihistamine Claritin, anti-cancer/anti-viral agent Intron A, and Rebetron Combination Therapy for hepatitis C. We'll have more to say about this Rule Maker's results when it releases its 10-Q in August.
One last thing -- promise! -- this time on the subject of portfolio accounting. If you look at our portfolio data below, you'll see that we've added the 11 shares of Delphi Automotive Systems (NYSE: DPH) that were spun off by General Motors. In addition, we're now reflecting the 6 shares of Microsoft (Nasdaq: MSFT) which were purchased on July 7. Although we haven't yet implemented our new portfolio accounting system (as discussed at the bottom of the July 13 column), we wanted to go ahead and reflect these changes in our holdings.
[By the way -- if you have any friends or relatives who might enjoy reading this report on Apple, click on the "E-mail this to a friend" link in the upper-right-hand corner.]
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Day Month Year History R-MAKER -1.87% -0.95% 12.41% 41.57% S&P: -1.33% -0.86% 11.30% 37.66% NASDAQ: -2.80% -0.04% 22.43% 62.41% Rule Maker Stocks Rec'd # Security In At Now Change 6/23/98 68 Cisco Syst 29.21 61.13 109.30% 5/1/98 82 Gap Inc. 23.05 47.00 103.88% 2/3/98 54 Microsoft 45.13 91.06 101.76% 2/13/98 44 Intel 42.34 63.88 50.87% 5/26/98 18 AmExpress 104.07 137.00 31.65% 2/3/98 66 Pfizer 27.43 35.19 28.27% 6/3/99 11 Delphi Aut 17.19 19.38 12.71% 2/6/98 56 T. Rowe Pr 33.67 37.06 10.07% 8/21/98 44 Schering-P 47.99 51.13 6.53% 2/27/98 27 Coca-Cola 69.11 63.13 -8.66% 2/17/99 16 Yahoo Inc. 126.31 145.13 14.90% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 64.34 78.19 21.53% 3/12/98 20 Eastman Ko 63.15 71.00 12.44% 3/12/98 15 Chevron 83.34 93.63 12.34% 3/12/98 17 General Mo 61.28 65.69 7.19% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 54 Microsoft 2437.28 4917.38 $2480.10 6/23/98 68 Cisco Syst 1985.95 4156.50 $2170.55 5/1/98 82 Gap Inc. 1890.33 3854.00 $1963.67 2/13/98 44 Intel 1862.83 2810.50 $947.67 5/26/98 18 AmExpress 1873.20 2466.00 $592.80 2/3/98 66 Pfizer 1810.58 2322.38 $511.80 8/21/98 44 Schering-P 2111.7 2249.50 $137.80 6/3/99 11 Delphi Aut 189.09 213.13 $24.04 2/27/98 27 Coca-Cola 1865.89 1704.38 -$161.52 2/6/98 56 T. Rowe Pr 1885.70 2075.50 $189.80 2/17/99 16 Yahoo Inc. 2020.95 2322.00 $301.05 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1420.00 $157.05 3/12/98 15 Chevron 1250.14 1404.38 $154.24 3/12/98 20 Exxon 1286.70 1563.75 $277.05 3/12/98 17 General Mo 1041.80 1116.69 $74.89 CASH $255.59 TOTAL $34851.65
Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.