AMITIAE - Sunday 27 January 2013

Why would Wall Street want Apple as a Broken Company (3): Apple under attack

apple and chopsticks


By Graham K. Rogers


Apple is not a broken company, although reports in some media outlets and the follow-on bloggers may suggest otherwise. Wall Street short term gains and analysts comments have done much to damage the company's stock market health. Those intent on profit-taking may have shot themselves in the foot, but there may be another reason for the unusual pressures: that forcing the share price down will soften up Apple in such a way that it could become subject to takeover moves which could lead to an eventual corporate breakup.

Not long after Steve Jobs died there was increased pressure in the financial press, with some of the bloggers joining the chorus, for Apple to use its cash (called a "cash hoard") and pay a dividend. Note also that the pressure on Apple to use that money had been part of the conclusion of the NYTimes articles on workers in China.

Peter Oppenheimer While Apple sees the money as a buffer - sometimes allowing it to make purchases for various reasons - Wall Street thinks it is sitting idle in a cupboard in CFO, Peter Oppenheimer's office. They also never mention that a large part of that sum is in foreign parts and its repatriation would cost the company some 30% with current tax rules. One can imagine the headlines if Apple were to do that.

With Tim Cook at the helm and the cash continuing to grow, a dividend was announced as well as a share buyback scheme: just enough to cover the shares issued as incentives to executives. With the picture now changing, some are wondering if the buyback scheme should be expanded.

Apple however is a rather conservative company financially. The cash at hand is an example of its long-term thinking and when there are bad days it will still be able to pay the staff, buy the materials it needs and continue to invest in research. The calls to increase dividends that are starting to appear are shortsighted. No change this time, so any dividend change would be impossible until Q2 2013, by which time the targets will have changed.

With its conservative outlooks, when Apple reports its financial results it usually exceeds its own estimates. This is coupled with - in recent times - some records: revenue, iPhones sold, iPads sold, profits. With the argument that what goes up, must come down, the analysts seized on the apparent flat profit report for Q1 2013. This was their "Aha!" moment: Apple has hit a cloud; it will begin to contract; shrinking; the sky is falling.

The profit was one of the largest ever of any company and this is a failure? And what many ignored was the small difference that a 13-week period (over last year's 14 weeks) made to average figures, especially at a time when almost all other IT-related companies have reported far lower sales, with many reporting losses (but without the baying media snapping at their heels).

Indeed, one of the features of Apple's financial reporting is the way that Apple's estimates are exceeded each time (that in itself a cause for criticism by some), but the estimates of the analysts are not met: Apple fails to reach the analysts' guesses and Wall Street reacts. For the last couple of years (at least) despite its excellent figures, Apple stock prices have dropped.

The way many analysts seem to come up with their estimates is to piece together small factoids - supplier chain data, internet use by device, customer reaction - to produce some figure that bears little relation to reality. Trawling for information may work well for the Intelligence community where a general picture is valuable to gauge what a suspect may be involved with, but to feed such information to investors, some of whom may be using their hard earned cash to save for later (retirement, children's education) is irresponsible.

Some Apple watchers are mystified about how the analysts arrive at these figures - always wrong - and a cartoon in Joy of Tech (Tarot cards, phrenology, tea leaves?) paints an interesting picture.

Talking it up and talking it down

As well as the inability to predict Apple's figures, there was the wild enthusiasm by some over the last couple of years to talk the share prices up: $700, $800, $1200. While some were a little more conservative about the future share price, many were not and their enthusiasm was infectious. Investors ran to Apple and the price soared.

A year ago, just after the Q1 2012 results it dropped a little to $315 after several months around $300-350, then climbed to $702, making the Corporation larger than Exxon. Since that time, the chorus of criticisms eroded investor confidence and it sagged to around $500 by mid-January. When the record Q1 figures appeared it fell, then a single sell-off of some 800,000 shares caused a sharp drop and the price now stands at around $439. The fruit is ripe for picking. The cash in hand alone ($137 billion) may have some slavering.

iMac It is my contention that talking Apple down serves little real practical purpose as the company is the same today as it was last year with good sales of its current product lines, more announcements expected in the next months and a rumour of a completely new product. While some expect this to be a TV, not everyone is sure. The CEO hinted recently about something completely new.

There is also the question of software. As a long-term Mac user, the applications that are available with new Macs (and OS X) as well as the consumer and professional apps that Apple has developed, mean I can do all of my productive work and with many apps can also synchronise with the other devices (computers, iPhone, iPad) that I use.

Although Apple is a hardware company, and some argue that this market is becoming saturated, there is still the field of software that would allow increased sales.

Apple may seem more valuable to Wall Street as a company that is ripe for stripping. The corporate raider takes over a company at a good price, then hives off the parts of the company, and makes a sizeable profit by so doing. But the price must be right.

Despite the pressure on the CEO, Tim Cook remains in charge. This should not change at the next shareholders meeting which is to be help on 27 February 2013, although in recent times corporate holders have pressured Apple on a number of questions. There are also reports that CALPERS (a large fund in California that owns a lot of Apple stock) is pressuring Apple to "institute a widely used rule that directors face majority votes in uncontested elections". What will be demanded next?

As I discussed in Part Two, changes at the top need to be done carefully and a company like Apple would be better served by those (Cook, Schiller, Cue, Oppenheimer) who have been operating within the company for years and understand what Apple is. Wall Street would not understand that last sentence; or if they did, would dismiss it as irrelevant. This is a company, shares are traded, it is subject to the laws of market physics as are other companies. Wall Street never understands the philosophies of a company: its dynamics and the chemistry; what makes Apple (or BMW or the Oriental Hotel) what it is.

The risk here is that bit by bit, the massive investors force change on Apple that decrease its effectiveness as a unique entity. Wall Street would buy a Van Gogh painting (for example) for its investment value rather than its beauty.

The Sum of the Parts

With Apple the sum of the parts is not greater than the whole: part of that complete construction is contained in the abilities (and the visions) of its staff from Cook downwards. Would any investor be able to guarantee that Jony Ive or Bob Mansfield, Cue, Oppenheimer, Schiller, et al would be there 6 months after the arrival of a corporate raider?

We have seen in the past many cases when asset strippers have arrived, or when companies are organised for the sake of efficiency. As a Brit, I think of the former British Leyland, or of the railways systems in the UK (as well as the Beeching report of the early 1960s). TWA ended up as a memory, while COMPAQ (where Tim Cook once was) has gone. As has Palm (to HP), Sun, and many more.

With the share price being forced down, Apple is in danger of becoming a target for those who would try and take over the company. It does not matter that Cupertino is strong, that products are coming, that there are expanding markets. Control of the shares is the key and - just as in Monopoly - once you have amassed enough, you are unstoppable.

From the other side of the world (where I am based) I wonder how the analysts pressures, the possible stock manipulation and the recent massive sell off are not under investigation by the SEC; or why (apart from long-term Apple observers) some of the press are not up in arms about the way Wall Street and friends are behaving towards Apple - what is the point? What is the real point?

I used to think that Apple stock was being talked down so that investors could make money when the stock price rebounds as it does with some regularity, but this time I think there are more sinister moves afoot. Wall Street will only have itself to blame if once again they slaughter a goose that lays golden eggs.

In Part One, I examine the background to Apple's recent outside pressures

In Part Two, I analyse specific points and include a number of comment of my own.

Graham K. Rogers teaches at the Faculty of Engineering, Mahidol University in Thailand. He wrote in the Bangkok Post, Database supplement on IT subjects. For the last seven years of Database he wrote a column on Apple and Macs.



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