Market Commentary: Apple's greatness continues

On Monday equity markets closed mixed with European stocks comfortable in the green, and US swinging from gains to losses with all major indexes closing lower on the day. Last night investors around the word turned their attention to perhaps the most anticipated earnings release of the entire season: Apple Inc.

The Cupertino-based technology giant reported its quarterly results after the closing bell, and investors were once again prized with a staggering performance: record revenues, record profit and double digits growth. Defining analysts’ forecasts, Apple posted revenue of $58.01 billion, $1.95 billion ahead of expectations and 27% up from the same quarter a year earlier.

The major drivers of this impressive growth and revenue generation were the new iPhone, which continues to be the backbone of Apple’s sales accounting for 69% of its total revenues, and China, whose iPhone’s sales surpassed the one generated in US, becoming, for the first time ever, the iPhone’s largest geographic market.

Although the skepticism of several analysts, the company sold 61.2 million iPhone devices, up 40% form from a year earlier, generating over $40 billion in revenues. The iconic phone was not the only product recording growing sales, units of the historic Mac computers and laptops also grew by 10% from a year earlier, generating $5.6 billion, 2% up from first quarter in 2014.

In contrast, the iPad continues to be Apple’s weak spot, with declining revenues that amounted to $5.4 billion, -29% year-on-year. Although Services (such as iTunes, AppleCare, Apple Play, etc.) contribute for just $5 billion, they recorded a 9% growth from the past year.

Apple also reported a record profit of $13.6 billion over the first three months of the year, posting an EPS of $2.33 per share, beating analysts’ expectations by $0.17. Gross margin also jumped to 40.8%, better than the company’s guidance of 39.5% and up 150 basis point from a year earlier.

Although expenses and R&D investments increased by 18% and 35% respectively, the company confirmed to be able to generate excess free cash flows to, not only maintain an impressive operating margin, but also increase distributions to shareholders. Apple closed the quarter with as much as $193 billion in cash and equivalents (an amount large enough to buy an entire company of the size of IBM and still end up with over $30 billion left), and only $44 billion in debt.

Following the strong results, Apple expanded its already generous return of cash to investors by approving a $50 billion increase to its buyback program, which will now amount to $140 billion, and through an 11% increase in its quarterly dividend to $0.52 per share.

Apple’s dividend yield stands at 1.5% at the closing price of yesterday, and with the company continuing to accumulate excess cash, an additional hike next year is highly probable. By increasing its divided, the Cupertino giant has also become the largest dividend payer within the S&P 500 Index, taking the helm from ExxonMobil which had retained the title until yesterday.

Although the current price may seems to many as relatively expensive, I believe that Apple still represents a great investment opportunity with still plenty of upside potential supported by double digit growth, a divided that is likely to keep increasing over the next few years, and new products that will expand the already rather profitable iPhone’s ecosystem.

Apple shares closed 1.82% higher ahead of the results, adding another 1.33% in after-hours trading, suggesting a rally in the stock at the opening of the US markets this afternoon.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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