Drama. Apple Incorporated needs to turn over its inventory more than 20× a year in order to make earnings. The only thing that we buy that frequently is fresh fruit and milk. That means that they need to keep finding new customers (Forbes, August 19, 2014, Apple Tops $100 To Notch Record Close As Next iPhone Looms).
Where are they? Try to imagine a kindergarten class in which all the kids are talking to each other, on their cell phones. OK. But there are lots of companies that make great phones (some of which are no longer with us) and are also competing for their attention.
Exhibit 1: (B)(N) Apple Incorporated – Fundamentals
With reference to Exhibit 1, above (please click on it to make it larger, and again if required), the “Inventory Turns” to make earnings are 24× (Earnings $37 billion/Inventory $1.6 billion) which puts the “required productivity” and, therefore, the “Inventory Risk” at +4.15, which is a “big number” on that scale (which we’ll explain below).
And there are other “challenges” as well.
The “Fixed Plant Productivity” is +1.08, which means that they need to “work for it” but, on balance, if they keep “working” the way that they are, their “Enterprise Risk” is +1.88 ((1+log(N/N*), in this context), which means that “their future is already here” with N=$120 billion and N*=$50 billion (in relative terms); please see Exhibit 1 above.
Investors have also bid-up the stock price so that $1 of the Coase Dividend “retails” for $42, which is about twice the rate of the Dow Jones Industrials and the S&P 500 companies. That’s OK, too, because we can buy and hold the stock as long as it’s trading above the price of risk ($80 currently), and we can protect the prices that we get with an attentive stop/loss policy, in case the “investors” change their mind and “hang-up” without much warning; please see Figure 1.1 above.
It’s also positioned as a “growth company” so that the “return of earnings” as dividends is only 30%, which means that it has a “negative dividend risk” (-0.16), which also tends to mean that it is “overvalued” despite the current dividend yield of 2%; please see our Post “(P&I) Dividend Risk and Dividend Yield“ for more information.
To understand the “risk measure”, we can look at the “Inventory Risk” = 1+log(Earnings/Inventory) = +4.15, for example.
Doing the math, Earnings/Inventory = exp(-(1-“Inventory Risk”)) and, therefore, Earnings = Inventory×(1/e)×exp(“Inventory Risk”), so that the “e-folding rate” of the inventory (Inventory×(1/e)) needs to be “pumped” as exp(“Inventory Risk”) = exp(4.15) = 64×, in order to “make earnings” with inventory at 24×.
But the only things that “grow” at that rate, are “bacteria”, and eventually, they run out of food.
For more information on real “risk management” and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.
And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.
And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.
And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.
We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product
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Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.