The Commerce Department reported today that the U.S. trade deficit rocketed to $54 billion in August, the second-highest level ever. The run rate for this year's trade deficit is $590 billion, 19% higher than last year's $496.5 billion imbalance. The highest contributors to the deficit were American retailers' orders for cell phones, toys, and televisions from China and a 12.2% jump in petroleum imports.

Speaking of oil, the price of a barrel of crude topped $54 a barrel today.

Stocks didn't like any of this, with the Dow falling more than 1%.

In today's Motley Fool Take:

Is Apple Still a Computer Company?

By

Tim Beyers



Last week, we dueled over the prospects for Apple Computer(Nasdaq: AAPL) here at Fool.com. I contended then that Apple is a Rule Breaker, and I see no reason to change that opinion after yesterday's earnings report.

Indeed, Apple's Pod people are back. Fans of the cultish music players bought more than 2 million iPods during the quarter, accounting for $537 million in sales. That led all other Apple products.

Let me say that again, because it's crucial: Apple made more money off of the iPod than it did any other product. The PowerBook portable came in second at $419 million. That appears to be a first for the Mac maker, and the transformation ought to be a bit frightening for investors. I mean, after all, Apple is a computer company, and it isn't doing all that great a job of selling desktop computers. So far, however, they're showing no fear. Apple's shares are trading more than 13% higher as of this writing.

Yet sales of the iMac and Power Mac computer lines were down substantially, in terms of both dollars earned and units shipped. Part of the problem may be that Apple was late bringing its latest desktop -- the cleverly designed iMac G5 -- to market, missing much of the critical back-to-school season.

But I also think concerns over Apple's flagging desktop sales may be overblown. After all, portable computer sales continue to rise. Overall sales of the consumerish iBook and the more upscale PowerBook were down slightly from last quarter but up huge over last year. Unit sales of the iBook, for example, were up 74% over 2003.

Still, Apple has argued incessantly that iPod sales are leading Microsoft(Nasdaq: MSFT) Windows users to Macs, yet there's no proof that's happening. Certainly declining unit shipments don't bode well -- unless all these so-called Windows converts are buying mobile Macs.

For argument's sake, let's say they aren't. Does it matter? Not according to my calculations. Even with increased competition from other digital music players and declining desktop sales, Apple is doing a phenomenal job converting its sales into moolah:

Metric ($ in millions) Q1 2004 Q2 2004 Q3 2004 Q4 2004 est.
Sales $2,006 $3,915 $5,929 $8,279
Net income $63 $109 $170 $276
Depreciation and amortization $33 $69 $110 $139*
Capital expenditures $44 $79 $117 $154*
Structural free cash flow $52 $99 $163 $261*
Free cash flow margin 2.59% 2.53% 2.75% 3.15%*
* Estimated using current and prior financial statements.

Yeah, I know my numbers for the current quarter are pure estimates, and Apple didn't report how favorable currency rates may have affected earnings. Still, Apple ended its 2003 fiscal year with a structural free cash flow margin of just .29%. While nowhere near market leader Dell's(Nasdaq: DELL) current SFCF margin of 6.35%, the Mac maker's improvement in pulling cash through its channels is remarkable.

So I'll say it again: Apple's stock may be ripe and worm-ridden from every traditional valuation method, but its business is now as golden and delicious as it has ever been.

For more Apple-related Foolishness:

Fool contributor Tim Beyers is too much of a straight arrow to be a Rule Breaker in real life, but he loves companies that defy the odds for his portfolio. Tim owns no shares in any company mentioned, and you can view his Fool profile and stock holdings here.

Discussion Board of the Day: Trump's Apprentice

Have you been watching the second season of The Apprentice? Did you catch the QVC special on Monday night? Is product placement becoming too distracting, or does it fit right at home in a business-related show? All this and more -- in the Trump's Apprentice discussion board. Only on Fool.com.

GM's Spinning Wheels

By

Alyce Lomax (TMF Lomax)

Some investors may have seen this one on the horizon. General Motors(NYSE: GM) reported third-quarter earnings that came in at the low end of estimates. Along with weak earnings, the automaker reduced its forecast for the year and announced that it will cut 12,000 jobs in Europe.

Net income at GM increased 3.5% to $440 million, or $0.78 per share. Revenues increased 3% to $44.9 billion. (If you had a tough time finding a copy of the news release like I did, you can find it attached as a Form 8-K at the SEC's site.) Despite the sunnier view from lending operations, there was plenty to worry investors.

GM said that health-care costs are proving a heavy burden to its earnings (the high cost of health care is no strange topic for anyone who has been following the presidential debates). However, it's clear more than that is ailing GM and rivals such as Ford(NYSE: F) and DaimlerChrysler(NYSE: DCX).

The company also cited overseas problems, with increased losses in Europe, lower production volumes in North America, and slower economic growth in China. However, we all know that here in the U.S., economic concerns still weigh on citizens to the extent that automakers, including GM (quiet desperation, anyone?), have been forced to push deep incentives to get vehicles moving off the lots. Consumer uncertainty has reared its head again, not to mention concerns such as rising gas prices.

Although GM had guided higher in the middle of the year, saying it expected to earn $7.00 per share, it has now returned to its initial expectation of earnings between $6.00 and $6.50 per share. Furthermore, the company also said that while it expects positive cash flow for the year, it does not expect to hit the target of $5 billion it had previously set.

In its conference call, the company called the quarter disappointing, citing the possibility of downgrades of its debt rating, as well as the first quarterly loss in the automotive segment in about a decade (with the exception of that which occurred during 1998 strikes).

Today's word from GM does give investors a lot to contemplate. Fool contributor Rich Smith and others here have taken a look at the automakers over the last several months and predicted coming difficulties. Given the variables at hand, many automakers may be spinning their wheels for a while yet.

For some more information on the automakers' challenges, check out the following Foolish content:

Alyce Lomax drives an eight-year-old Subaru that she has beaten up pretty well. The way she sees it, if it can make it eight years, it can make it 10. She does not own shares of any of the companies mentioned.

Quote of Note

"Whatever you are, be a good one." -- Abraham Lincoln

Hooker Takes a Hit

By

Rich Smith

Furniture maker and Motley Fool Hidden Gems selection Hooker Furniture(Nasdaq: HOFT) reported a blip in its quarterly profits on Tuesday, and its stock paid the price in Wednesday trading. A few short hours were all it took to vaporize 8% of Hooker's market cap. Yet the company didn't suffer a reduction in sales. It didn't lose money. On the contrary, year-on-year, Hooker increased sales by nearly 13% and remains firmly profitable. The problem, in Wall Street's myopic opinion, was that it became slightly less profitable this quarter than it was in Q3 2003. Specifically, net earnings dropped from $0.31 to $0.27. Throw out a $0.10 per share restructuring charge related to plant closings, however, and earnings were up.

Sometimes it's depressing how shortsighted the market can be. But on the other hand, when a stock takes an irrational hit to its price, that can provide a good entry point for Fools who keep the long-term picture firmly in view. So let's take a look at the company's past nine months' results: To date, Hooker has clocked $254 million in sales for 2004, an 11% increase over its numbers for the first three quarters of 2003. On the earnings front, Hooker has already racked up $1.09 in profits for the year. That's a 12% increase over the first three quarters of 2003, so profit growth is outpacing sales growth. (This is a good thing.) Given that Hooker expects to see 10%-15% year-on-year sales growth in Q4, and earned $0.31 in Q4 of 2003, it seems likely the company can post profits at least in the mid-$0.30s come December, for a total annual profit of $1.45 or thereabouts. That would fall well short of analyst estimates of $1.75, but would nonetheless leave Hooker with a pretty reasonable P/E ratio of about 17.

There are only two other things in Hooker's earnings report that I see that could have spooked the Street. First, cash from operations dried up from last year's torrent of $22.5 million to this year's trickle of just $1 million. Subtract from that last number the $2.6 million Hooker has spent on capital expenditures so far this year, and the company now looks to have negative free cash flow. Second, inventories at Hooker ballooned nearly 70%, which could be bad. But in its earnings release, Hooker did not break down the inventory number to explain whether it reflects finished goods piling up, unsold, in its warehouses or lumber, nails, and upholstery being collected to support a continued surge in sales in coming quarters. Hooker did, however, point out that it has a large backlog of orders, and characterized its inventory position as "solid." That suggests that the inventory build-up is probably not a problem. This is, however, something that prudent Fools should look into when the company files its 10-Q with the SEC.

For more Foolish news and commentary on Hooker Furniture, see:

Fool contributorRich Smithowns no interest in Hooker Furniture.

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