Apple report is much ado about nothing

Tue, May 6, 2014, 01:07

Investors liked Apple’s latest earnings report, driving the stock from $525 to $600 (€379-€433). The big question, according to renowned valuation expert Aswath Damodaran, is why.

Damodaran, an Apple shareholder, valued the company at $649 prior to the earnings report and $648 afterwards.

There was nothing new; it reported low revenue growth and continued pressure on margins while the announcement regarding stock buybacks and dividends had little impact on Damodaran’s valuation.

The stock split? “Purely cosmetic”, and unlikely to significantly boost demand for a highly liquid stock like Apple. Might the increased dividends make investors feel more secure?

Is the stock buyback a signal Apple believes its stock is undervalued?

Perhaps, but “Apple has tried both moves before, with little success”.

Last August, this column referred to Damodaran’s value of Facebook, which had seen its stock go from $38 to below $18 and back to $38.

His fair value model was little changed during that time, however, ranging from $24 to $27.65.

Apple appears little different; it’s all a case of “investor psychology and market momentum, two forces that are immune to rationality”.

Where have all the splits gone?
Apple aside, stock splits have become a rarity in recent years.

In the 1990s, an average of 64 S&P 500 companies split their stock annually, with one in five doing so in 1997.

Splits tend to occur in high-priced stocks, so that number fell after the dotcom collapse.

Still, it remained common to see about 40 stock splits annually, Credit Suisse estimates. Since 2008, however, an average of just 12 S&P 500 companies have done so each year.

The average S&P 500 stock is now valued at almost $80, roughly double that seen four years ago.

It’s peculiar. Splits are cosmetic – two $40 shares are, obviously, the same as one $80 share – but they can yield benefits.

Over the past three years, Credit Suisse found, every stock that split either popped or stayed flat, gains averaging 1.4 per cent. Trading spreads narrowed dramatically, averaging 35 per cent.

With both Google and Apple recently announcing stock splits, the practice may yet come back into fashion.

Betting the farm on home
It’s never been easier to hold a cheap, globally diversified portfolio.

A recent Goldman Sachs note, however, indicates most investors couldn’t be bothered, preferring to bet the farm on their home market.

So-called home bias has fallen over the last decade but remains strong, with 76 per cent (previously 81 per cent) of domestic equity holdings in developed markets held by domestic investors.

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