Over the past year, shares of tech giants Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), and Oracle (NYSE:ORCL)have lagged the averages. Yet these companies continue to generate and accumulate enormous amounts of cash.
Are investors missing an opportunity, or is something else going on?
These companies are all wrestling with the same opponent: transition. Let's have a closer look.
The device gorilla
Many consider Apple products the gold standard. Brilliant technical innovation, supply chain excellence, and outstanding marketing have been corporate hallmarks. Current balance-sheet cash and investments of $147 billion have eclipsed the market cap of most S&P 500 stocks. The $163-per-share hoard is equivalent to about one-third of the share price. After a brief pause, year-over-year cash flow has begun increasing again.
Intel manufactures about 80% of the world's computer chips. While criticized for being late to the handset chip market, the company set its sights upon the server chip market. Balance sheet cash and investments are now more than $27 billion, or 22% of market cap. In 2012, Intel management borrowed $6 billion to buy back stock. That move conserved cash as the dividend payouts were greater than the interest expenses. Meanwhile, the company generates cash flow of $18 billion a year.
The software sleeper
Oracle produces industry-leading software sales on huge operating margins. Management has now turned to growing a complimentary hardware business. The balance sheet is rife with cash and investments, totaling more than $39 billion. More than a quarter of the recent share price of $33.50 is found in cash and investments. Operating cash flow just keeps rising, totaling more than $14 billion in the fiscal year ending May 30.
Here's the cash-balance and cash-flow recap:
Cash/Investment Balances and Operating Cash Flow
|Cash and investments ($billions mrq)||$146.8||$27.2||$39.1|
|Cash / share||$163||$5.48||$8.56|
|Cash % of recent share price||31%||22%||26%|
|Cash flow ($billions latest FY)||$53.7||$18.9||$14.2|
|Cash flow per share (latest FY)||$59.70||$3.80||$3.11|
|3-yr cash flow CAGR||41%||18%||19%|
So where's the mojo?
Despite high cash balances and a demonstrated ability to generate more, these three stocks have trailed the 2013 averages. Through October, the S&P 500 has jumped more than 23%. Meanwhile, Intel has climbed 18%, Oracle less than 1%, and Apple has registered a 2% loss.
Transitions are at the root of the lost mojo.
Investors dislike transitions
Apple, Intel and Oracle are all facing transitions. Investor sentiment has been negative, resulting in P/E compression.
Apple is transitioning from rapid to modest growth. While cash has continued to pile up, earnings per share peaked in fiscal 2012 and eased in 2013. Investors went from euphoria to panic, first believing corporate earnings would forever rocket up, then worrying that the company could no longer grow at all. A loss of 3.5 multiple points and a modest reduction in EPS took the stock from a 2012 high of $700 to about $520 today.
Intel enjoyed a tremendous jump in net income after the 2009 crash, but earnings have stalled since then. Investors fret the company is locked into a forever-moribund PC industry and missed the mobile market entirely. Many investors continue to shun the stock while it transitions into new markets and products. Flat earnings and revenues have resulted in the stock falling from a 2012 high of almost $30 to about $24 today. The P/E is 13.
Oracle can't shake its bogeyman, either. Over the past five years, earnings have grown at a consistent mid-teens pace. The company has begun paying dividends. However, top-line revenues have flatlined. Investors fear that smaller competitors like Salesforce.com are threatening the business. The stock price has stagnated, as Mr. Market shaved the P/E ratio from more the 25 to less than 15, negating otherwise excellent EPS growth.
What's the prognosis?
Previous go-go companies facing business-model transitions often see growth investors rotate away. Over time, cash-and-income investors replace them.
Apple was facing unsustainable expectations for EPS growth. Intel got tripped up as the market phased from PCs to handsets to tablets, and Oracle got dinged over revenue growth and competitive fears from smaller upstarts.
Nonetheless, the trio continues to generate and accumulate vast sums of cash. The business models are in transition, not broken.
The stocks tread water while the growth guys sell out to the cash-and-income investors. Once the transition is over, valuation multiples typically return to normal, along with investor sentiment.
More modest revenue and earnings expectations, combined with a sound and growing dividends may offer patient investors with a longer view some good returns.