Apple: the world's leading momentum play

Is NASDAQ-listed Apple now the world's leading momentum play? The company's second-quarter results to end-March have seen like-for-like revenue jump by 27.1% to $58 billion (£38 billion), net profit by 32.7% to $13.6 billion, earnings per share by 40.1% and the period dividend by 8%.

Such numbers are especially creditable amid a strengthening US dollar which prices goods higher overseas and devalues those revenues/earnings when translated back to US currency. It knocks for six the bearish argument that Apple could not innovate successfully after the Steve Jobs era; indeed, a major refreshment of Apple products was my key rationale in drawing attention at $71 equivalent (pre-stock split) back in August 2013, with the stock trading on a modest 12.5 times earnings. The chief executive currently says: "We're seeing a higher rate of people switching to iPhone than we've experienced in previous cycles, and we're off to an exciting start to the June quarter with the launch of Apple Watch."

"Must-have" iPhone dominates the product portfolio

Admittedly, this puts increasing emphasis on iPhone sales which now represent 68% of Apple's revenues: 61.2 million were sold in just three months versus 37.2 million in the like-for-like period. The release of the iPhone 6 last September has boosted sales and also the average selling price of an iPhone has risen by $62 to $659 in the quarter. Substantial growth is coming from emerging markets which eases concerns that Far Eastern rivals - especially Samsung - would encroach.

The Chinese New Year helped Apple sell more iPhones there than its home market for the first time: China revenues surged 71% compared with 19% in the Americas. Socially, a lot more Chinese are becoming middle class with the iPhone ideally placed as a "must-have" status symbol. It also implies a December 2013 deal with China Mobile, the world's largest carrier, is working well. To date, 21 Apple stores have opened in China with 40 more targeted by mid-2016.

The progress may have cannibalised iPad sales, however, down from 19.5 million to 12.6 million like-for-like, and against 21.4 million in Apple's first quarter - the iPhone 6's larger screen reducing the iPad's appeal. Apple Mac sales edged up from four million to 4.6 million, albeit down from 5.5 million in Q1. The Apple Watch smartwatch priced from $349 has just been launched with demand out-stripping supply, currently available in nine countries. Mind how consumers' real verdict has yet to be given, and achieving anywhere near the status as the iPhone will depend much on how Apple responds to this and evolves the product in the years ahead.

Bumper capital growth and shareholder returns

The quarter's financial momentum has also meant $19 billion cash flow in aid of Apple’s extending its capital return programme by $70 billion to $200 billion by end of March 2017. It has significantly resulted from shareholder activists pressing in recent years for greater return of Apple's soaring cash hoard; this and a stock split to reduce perception of a "heavy" market price over $500 was why I drew attention again at $81.4 equivalent ahead of the 7-for-1 split last June.

Showing how specialist technology analysts are not always right, the consensus of Apple analysts then reckoned on 6.5% upside in the stock - but it has risen ten times that, including dividends, and is still rated modestly considering the commercial momentum. The essential point I made a year ago was: "expectations can swiftly rise as the iPhone extends its appeal globally."

Hence, it is odd to conservative eyes how the capital return programme is involving debt, although the company was encouraged - if not prodded - to do so by shareholder activists. So far, over $112 billion has been "returned" including $80 billion share repurchases which it is also possible to question as a true return. The dividend needs to rise anyway to constitute a worthwhile yield, projected up from 1.5% to 1.9%, if fairly generous in tech-stock context. The near-term objective for raising the dividend is 11%.

Price/earnings rating is relatively modest

A technology share tends to be valued primarily on price/earnings (P/E) relative to the underlying growth story, and at about $132 currently Apple's historic multiple of 18 falls to 14 if the 12-month forward consensus forecast is fair. This compares with 12-month trailing P/E multiples of 21 for the S&P 500 index and 23.2 for the Nasdaq 100; and on a 12-month forward basis, 18 and 19.5 respectively - so there is ample scope for buyers to reckon on comparative value.

As if it is not hard enough anyway to find stocks with such revenue and earnings momentum. These qualities quite give Apple a defensive profile, refreshingly free of deflationary risks that dog many others. Its brand power confers relative freedom to price, versus the competition, indeed Apple appears what economists call a Giffen good, where people consume more as the price rises - violating laws of demand. Arguably the stock rating should incorporate this better.

Blue chip attractions

The five-year chart looks as if Apple has had a plenty good run, i.e. the risk/reward profile is more dicey now. It will, therefore, be interesting to see if the fundamentals I outline - which point to significant further upside - prove more influential.

Apple has another blue chip attraction: as a liquid means for sterling-based investors to get US dollar exposure. Currencies can always surprise and the dollar has just lately taken a dip; but the balance of probability suggests further strength as the Fed edges towards raising interest rates.

Meanwhile, post-election Britain could mean weak government hurting confidence in sterling. Partly as a sterling hedge and offering good liquidity trading in London, Apple is one of the easier US stocks for UK investors to engage.

For more information see www.apple.com/about.