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CNET recently put out an article discussing the most profitable US corporations. The article shows that even with Apple’s disappointing quarter that caused a major drop in stock price, Apple is still had more income than anyone else. The issue is that the analysts thought that the results were going to be even better, so the analysts were disappointed. When you disappoint analysts, they punish you by saying bad things. I am borrowing the great CNET chart below.

 

Apples disappointing quarter in context chart

 

To this analysis, I would like show how cheap these stocks really are. While I try to not compare the P/E ratio of non-competitors, I think it is valid for this one exercise.

If we look at the P/E and EPS of these companies, it is quite telling how cheap Apple really is among this peer group.

 

Company

Symbol

P/E

EPS

Apple Inc.

AAPL

9.78

44.10

Exxon Mobil Corporation

XOM

9.17

9.69

Microsoft Corporation

MSFT

15.39

1.82

Pfizer Inc.

PFE

22.36

1.26

International Business Machines Corp.

IBM

14.57

14.41

JPMorgan Chase & Co.

JPM

9.64

5.20

Wells Fargo & Co

WFC

10.85

3.36

The Procter & Gamble Company

PG

19.76

3.90

General Electric Company

GE

17.08

1.39

 

It might not be obvious from looking at the above table of values. Looking at P/E as a chart shows that Apple is one of the cheapest stocks by comparing its price to the earnings of the company.

Apple's PE compared to the most profitable companies

 

It really becomes obvious then by looking at the earnings per share in chart format!

Apple's EPS compared to the most profitable companies

 

So if you think that Apple’s days are done, you may want to think again! In fact, the biggest complaint that you can say about Apple is it seems that they are not getting enough shareholder value! 

If you think that IBM is fairly priced for its earnings then it would be realistic that Apple could increase its share price by 50% if you focus on P/E! By looking at Microsoft, you could say that the price could go up 60%! This means that it is likely that Apple has more upside potential than downside risk.

My disclaimer on this site consistently says that I ‘might’ be long any stock I talk about. In this case, I am long on Apple as I write this article. However, as I consistently point out in my book, The Confident Investor, I didn’t pay for those shares! My current Apple holdings are all free.  If you want to know how to get free stock in great companies, I suggest that you read my book. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.

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Company name Microsoft Corporation
Stock ticker MSFT
Live stock price [stckqut]MSFT[/stckqut]
P/E compared to competitors Good

MANAGEMENT EXECUTION

Employee productivity Good
Sales growth Poor
EPS growth Fair
P/E growth Poor
EBIT growth Poor

ANALYSIS

Confident Investor Rating Poor
Target stock price (TWCA growth scenario) $7.87
Target stock price (averages with growth) $5.09
Target stock price (averages with no growth) $6.6
Target stock price (manual assumptions) $54.2

The following company description is from Google Finance: http://www.google.com/finance?q=msft

Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to the customers. It operates in five segments: Windows & Windows Live Division (Windows Division), Server and Tools, Online Services Division (OSD), Microsoft Business Division (MBD), and Entertainment and Devices Division (EDD). The Company’ products include operating systems for personal computers (PCs), servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools. In July 2012, the Company purchased Edgewater Fullscope’s Process Industries 2 (PI2) software and intellectual property. In July 2012, Comcast Corp. acquired the Company’s 50% stake in MSNBC.com. In October 2012, it acquired PhoneFactor Inc. On July 18, 2012, it acquired Yammer, Inc. (Yammer).

 

 

Confident Investor comments: I realize a large number of people use and like Microsoft’s products but currently they are on a negative growth trajectory. This is a good example of not just buying the companies that make products you like. At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.
 

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If you are watching the news the last few weeks, you will have noticed that the current management team of Hewlett-Packard [stckqut]HPQ[/stckqut] is practically accusing the Autonomy management of lying. H-P management is saying that Autonomy was not worth what it paid for the company but the fault lies with Autonomy and not with H-P.

In my forthcoming book (hopefully on sale by Christmas), “The Confident Investor” I explain that investors should sit back and watch when a company makes a large acquisition.  Never own a company that sells more that 10% of itself (e.g. spins off a division) or buys another company that is larger than 10% of the original company (e.g. they acquire a company as a new division or subsidiary). These extraordinary events can radically change a company and divert its attention. While many such events will result in a stronger company, you cannot be confident in the short term that your investment is safe. It is usually safer to invest your money and time elsewhere while the dust settles.

The 10% rule of thumb is simply that, a rule of thumb. Sometimes you should be wary of a company making a smaller acquisition that is significantly above market value. Too often these deals include far too much goodwill and then that goodwill turns out to be bad.  In a recent Wall Street Journal article, “‘Tis No Season for Goodwill to Investors” it was pointed out that H-P is writing off more than $5B in goodwill for the Autonomy acquisition. They are not alone though since Microsoft [stckqut]MSFT[/stckqut] just did a $6.2B write-off and Bank of America [stckqut]BAC[/stckqut] a whopping $15.6B.

Sometimes, a major acquisition turns out well but you should always be wary. If one of your major holdings makes a significant acquisition there are a few quick steps to take. First, find out if the company is being praised by the business media. Typically, if the media is positive towards the acquisition then it isn’t terrible.  Second, do some quick analysis of the acquired company – would you invest in the company at the acquired price? If you are not sure how to establish a fair price then you really should read my forthcoming book as I spend time explaining how to value a company.

Not all acquisitions are bad but you should be wary of all acquisitions.

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The financial and technical news is buzzing this week about Google’s [stckqut]goog[/stckqut] acquisition of Motorola Mobility Inc. [stckqut]mmi[/stckqut] My general rule is that when a company acquires another company that is bigger than 10% of the parent then a Confident Investor needs to get cautious. Google’s revenue is $33.3B and Motorola Mobility’s revenue is $12.7B. Too many companies get very confused and get lost during a merger of this size and this is quite likely to happen here. For this reason, I am removing Google from my Watch List until Google has had some time to integrate MMI.

When the news of the merger first broke, the discussion was all about Google buying the robust library of patents that Motorola Mobility owned. While this is an immediate benefit to Google as they fight in the very litigious environment of mobile platforms, it would be foolish to limit this acquisition to just that portfolio.

Google is paying $12.5B for MMI. This is a pretty high premium to pay for the rights to the patents. If Google just wanted the rights to protect against lawsuits then they could have licensed these patents for far less money. Of course, Kevin Smithen, an analyst from Macquarie USA, thinks that Google only wanted the patents and will spin off the hardware business relatively quickly.

If Smithen is correct then the various Android manufacturers have nothing to fear. In fact, this would be the best of all worlds in that MMI will be severely confused as it moves into Google and then shuffled back out to private equity or some other manufacturer. This would be a recipe for near death for MMI going through that many transitions and their competitors will take advantage of that confusion. The various phone manufacturers would also enjoy the fruits of Google’s largess and have fewer patent problems as Apple[stckqut]aapl[/stckqut], Microsoft [stckqut]msft[/stckqut], and Oracle [orcl[/stckqut] try to stop or get a piece of the Android revenue stream.

However, I do not think that Google will miss the opportunity to compete with their top competitor: Apple. It is very clear that the Android OS will continue to be the most popular mobile phone OS just like Windows on the desktop is the most popular OS. However, just like on the desktop, the preferred vendor is Apple. Whenever a new phone running Android is introduced, it is compared to the gold standard, the iPhone.  Whenever a new version of Android comes out, it is compared to the gold standard, iOS. Whenever a new tablet comes out, it is compared to the gold standard, iPad.

I do not think that that Google wants to be the Microsoft of the phone. Rather, their culture is much closer to being like Apple. If you look at all of the products from Google (usually creating little to no revenue for the company) most of them are about defining and creating a great user experience. This is what Apple has almost always tried to do. The one place that Google doesn’t do this is in mobile phones where their OS, Android, is placed on so many different form factors that they no longer have a great user experience across the entire platform.

The addition of MMI to Google gives them the unique opportunity to create a phone platform that is tightly coupled between hardware and software that is only seen in products from Apple or Research In Motion [stckqut]rimm[/stckqut]. There, though, is the rub. Few companies have been successful at running a business that is equal parts hardware and software. Apple is the only one true success in that area while others were successful for awhile and then struggled (think RIM and Palm). Most companies do not do a great job of being great in both hardware and software. Rather, they focus on hardware (think HP[stckqut]hpq[/stckqut], Dell[stckqut]dell[/stckqut], and Lenovo) or they focus on software (think Microsoft, CA[stckqut]ca[/stckqut], and Oracle[stckqut]orcl[/stckqut]) and they let the other side be “good enough” to support the core. Yes, HP makes software but that isn’t the core of their business and, for the most part, their software is designed to operate their great hardware. Similarly, Microsoft makes computer mice but few people consider this to be the core of what Microsoft is. For years, Oracle was a software only company until they bought Sun, another company that struggled being a software company and a hardware company.

Apple though has carved out a unique position in that they make great software and equally great hardware and they combine the two together to enable an awesome user experience. That is what Google has the potential to do with MMI. It won’t be easy and they could elect to take the easy way out and spin off the hardware business. In addition to being incredibly difficult to do well, it is also risky in that their Android partners would be very unhappy about a well integrated Android phone competing with a “stock” phone running Android. The road to excellence may force Google to upset their partners a great deal and Google simply may not be up to the task of accomplishing this goal.

The Motorola Mobility deal also allows Google to be excellent in another area that is dominated by no one and may be even bigger than mobile phones. Motorola generated nearly $3.6B in set-top boxes and services for television. Google has dabbled in this area of the market without much huge success. The combination of Google’s software with Motorola’s set-top infrastructure could create an integrated environment that would have everyone else on the outside looking in on a very strong revenue stream.

This acquisition could be only about protecting Android from patent suits but that would be a shame since Android doesn’t add significantly to Google’s bottom line. If Google wants to be truly great, this acquisition could be about trying to learn from Apple and teaching the master a trick or two. The question is: can Google out-Apple Apple? While this will be interesting to watch, I would prefer to watch it from the sidelines and not as an investor so I will sit back for a few months to see how this proceeds.

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Apple [stckqut]aapl[/stckqut] has come under a great deal of discussion in the past week or so due to it’s ever expanding hoard of cash. Most companies hate having that much cash in the bank (or perhaps they are not fortunate enough to accumulate it) but Apple seems to really enjoy having a big savings account.

Since all the other bloggers that discuss companies and investing seem to have chimed into this conversation, I have to decided to do it as well.  Here are my suggestions:

  1. Use the cash like they have been. Apple uses its cash very effectively and very aggressively. As pointed out in PC Magazine, Apple effectively uses its cash to gain a technical advantage by locking up its supplier community in ways that their computer and device competitors such as Toshiba, Dell [stckqut]dell[/stckqut], and Hewlett Packard [stckqut]hpq[/stckqut] simply cannot afford to do. They are able to help manufacturers build their plants to create new components and lock in a pricing and supply chain that virtually locks out or delays the competition from the latest and greatest hardware advances. This competitive advantage means that they can continue to create large amounts of profit and build more cash.
  2. Increase R&D and rapidly expand their products with things that people want. Last year, Apple spent about 2.7% of revenue on R&D (and last year about 3.1%). I would like to see this grow to 7 or 8% of revenue. Yes, this is a big increase but Apple has a unique opportunity to solidify their presence in the markets that are important to them. Think what would happen if Apple had twice as many products that covered a broader spectrum of electronic experience.
  3. Increase their library. They should vastly increase their library of movies and video content to stream.  While they shouldn’t be stupid about the deals that they cut but they need to make deals with every movie and TV content holder out there. The consumer needs to feel that if they want to watch a professionally created video, Apple will always have the content. Making a ton of money in this area is not incredibly important (but don’t do it at a loss). What is more important is that they use this content to drive the sales of more multimedia devices and computers. While they are at it, they need to cut deals with the newspapers and magazines as well. Apple has had some short-sighted rules that have prevented the allegiance of those that create printed material – they need to put these rules aside.
  4. Streaming. They should make it so that they can stream to their subscribers more easily and more reliably than ANYONE else.  Supposedly they are investing in more data centers and that is a project that should be accelerated and expanded. Also, there are rumors of acquisition discussions with Hulu, this would be an acquisition that makes sense as it fits with their core offering today. Some commentators suggest that they should diversify by buying a company like Facebook but that would be ill-advised. Most companies that try to expand into vaguely related markets end up screwing up (think of EBay [stckqut]ebay[/stckqut] buying Skype).
  5. Integration with the cloud. They should make it so that integration between their products on your local network and between their products and the cloud is seamless and easy – in fact even fun.  Lion looks like it has great features in this area but they should take it to a new level. They would do well to expand that connectivity by putting a Windows application out there that makes Windows computers integrate easily and rapidly with Macs/iPhones/iPads. This doesn’t mean iTunes but instead iTunes on steroids – no cords – use the cloud, the private cloud, and the local connectivity connection of the computers.Read More →