Friday, July 21, 2006

Update on Apple and FedEx

Two of our portfolio stocks released quarterly reports this week. Lets pick through the results and see how it affects our portfolio.


There isn’t much to say about Apple. When I first analyzed Apple and issued a buy recommendation it was on the basis of continued iPod sales and my own math that we could expect significant gains in the Mac sector as well. Recently I reiterated that expectation in writing. Lo and behold, the quarterly report revealed that Mac sales were up 12%. I hope you bought when I urged you to, it gained almost 10% the day after the quarterly announcement alone.

Digging into the new numbers is interesting. Laptops were up 61% while desktops were down 23%. When I looked into this I found out that apparently there is a new trend toward laptops for younger customers, apparently the laptops are plenty powerful enough for day-to-day use and people enjoy the mobility. Interesting.

The surge should continue solidly into the school year, giving us at least another quarter or two of solid performance visible ahead. By the holidays when third quarter reports we should be looking for new products and trying to see what will drive Mac in the future.

Anyone with a business background has been taught about the “Innovation versus Exploitation” curve. Most organizations can either innovate, or exploit their older innovations – it’s very hard to do both at the same time. This is why big companies start research labs to get new innovations flowing and hope to be able to transfer some to the manufacturing line. At this golden time Apple seems to be in the sweet spot: their engineers are highly motivated and are both innovating and exploiting those innovations at the same time. Apple will be a good company to own for as long as they can keep this up.

As for the much touted “Zune” Microsoft iPod killer, this would be something like the 5th “iPod killer” announced since Apple conquered the market. I am skeptical but Microsoft also has big marketing bucks, so we will have to keep an eye on that.


Fedex put in an odd performance this week, moving up and then down and then up again to end the week almost exactly where it started. It seems the quarterly report was first highly anticipated (the rise), then a letdown (the drop), and then people decided it didn’t really change anything.

So what happened, and should we keep holding it?

Total revenue was up about 5% over the previous quarter, while net income rose 32.7%. This reflects the excellent cost structure that originally attracted us to FedEx where 1% revenue increase should increase profits by more than 1%. Year over year on a rolling 4 quarter basis we see a 10% revenue increase and 24.6% profit growth, which should be plenty to support the 18.6 Price to Earnings ratio FDX sports right now.

FedEx seems to have gained some slight market share as well from reading incomplete data from “Supply & Demand Chain Executive” with package volume growing about 4%. Operating margin also rose from 9.6% to 10.9%.

Earnings guidance for the next 12 months center around 13.6% profit growth, which might be responsible for some of the drop after the earnings release. This number includes the hit for accountings rule changes, though, and the high end of earnings projections with the accounting rules hit replaced (to allow year to year comparison) is 19.2% growth. The business looks strong, and this growth rate is what we would see in future years if trends continue past the one-year hit due to accounting changes.

At the end of the week we are back where we started with a comforting quarterly report that confirms our growth expectations and our cost structure understanding.

It sure would be nice if they could figure out how to make money off of the FedEx Kinko’s segment. Every time I’ve been in one of those places the people behind the counter couldn’t figure out how to print my color PDF documents, so I’m not surprised it isn’t working out for them – but it would be nice if they could turn that into a cash generator.

I’m keeping both these stocks in my portfolio.

Invest well,
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