At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Here, we'll show you whether those bigwigs actually know what they're talking about. With help from Motley Fool CAPS, we'll track the long-term performance of Wall Street's best -- and worst.
Speaking of which ...
On Thursday, one ambitious analyst at JMP Securities clanged an alarm bell about Apple
Hon Hai grew sales 80% year over year in December. But in January, its revenue increase slowed to just 36%, then fell to 26% in February. JMP pointed out that snapping together Apple products represents about 25% of Hon Hai's business. As a result, JMP concludes that any number of factors -- all bad for Apple -- could be hurting Hon Hai's business:
- Verizon may be having trouble selling iPhones.
- Apple may have halted production on iPads early this year, in preparation for the iPad 2's advent.
- Various Android clones from Motorola Mobility, Samsung, and other manufacturers could be stealing iPhone sales.
If forced to make a guess, JMP would probably say that the last scenario seems most likely, since Apple recently disclosed that global iPhone sales have now topped "only" 100 million, below the analyst's estimate of a 15 million-units-per-quarter sales rate. But whatever the ultimate reason for Hon Hai's deceleration, two things are clear: First, the effects of the earthquake/tsunami/nuclear meltdown in Japan could worsen the slowdown. Second, for the first time in a long time, there's a concrete reason to worry that Apple might disappoint investors in its upcoming earnings report.
Apple bites man
This morning, a whole host of Apple-backers turned their wrath upon the one analyst with the temerity to defy Wall Street consensus. Right now, 93% of analysts rate Apple a "buy" -- and several of them don't seem to deal well with disagreement:
- Oppenheimer: "The correlation between Apple and Hon Hai's revenue appears to be a product of coincidence more than causality…"
- Piper Jaffray: "… demand is stronger than ever, which should move shares higher."
- Credit Suisse: Apple is "the most valuable company in the world," will pass $500 a share, and will soon exceed ExxonMobil in market cap.
Credit Suisse sounds especially strident, predicting that the tablet PC market will grow from $0 in 2009 to $120 billion by 2015. And judging from the failure of rivals Dell
Underdog gets bitten
I'm alarmed by the ferocity of Wall Street's response to JMP's apparent anti-Apple heresy. And considering what I've written about Apple in the past, you might expect that if JMP's truly found Apple's weak spot, I'd be jumping for joy.
But in truth, while I'm certainly inclined to side with the underdog on this one -- here at the Fool, we believe that questioning assumptions is a good thing -- I actually think the majority is actually right this time. All four of the analysts quoted above are qualitatively "good." With CAPS ratings that show them beating 83% of the investors we track (Oppenheimer) all the way up to 94% (Credit Suisse), there's not a lot of difference between them, skillwise, nor much reason to prefer one's opinion over another's.
In a case like that, we have to fall back with what we know about Apple for a certainty:
- The company sells for less than 19 times earnings.
- It's got $27 billion in cash at last report, and not a drop of debt.
- And more cash pours in to its coffers each day, representing nearly $20 billion in annual free cash flow.
Foolish takeaway
With an enterprise value-to-free cash flow ratio of just 14.7, it doesn't really matter if Apple slows down somewhat in any given quarter. Long-term, most analysts agree that Apple is destined for 20% annual five-year growth. At today's price, hitting anything remotely close to that number will make Apple's stock a steal.
Or as JMP itself put it, despite downgrading the stock: "20% year on year growth is very good compared to everywhere else ... [Apple] is still a star."
