APPLE CEO RESIGNS

(This article originally appeared in the The Motley Fool's Evening News on Monday, January 06, 1997)

FOOL ON THE HILL
An Investment Opinion by TMF Templr

Apple Computer

The task of reinventing APPLE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> is not an enviable one. With market share in the hyper-competitive personal computer business plummeting while the company undergoes a painful restructuring, the only thing most analysts can agree upon is that the future is uncertain for the Cupertino, California-based concern. Volatility in the shares has been tremendous this year, roiled by optimistic high-notes from respected analysts followed by gruesome preannouncements of money-losing quarters. Today was no exception, with Apple down $3 7/8 to $17 7/8 after the company reported that the first quarter was going to blow chunks.

Revenues for the first quarter will come in below expectations because of poor performance in the company's Performa line of home PCs and shortages of many PowerBook models, despite strength in the PowerMac line and 40% year-over-year growth in servers. Poor results already preannounced by MICRO WAREHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MWHS)") else Response.Write("(Nasdaq: MWHS)") end if %> and MULTIPLE ZONES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MZON)") else Response.Write("(Nasdaq: MZON)") end if %> telegraphed weak Macintosh-related sales, but apparently some were waiting for the company to clarify how bad things were. The company anticipates a 10% drop in sequential revenues and an operating loss of between $100 million and $150 million.

In response to this development, Apple Chief Executive Gil Amelio stressed that the company's strategy remained the same, but they "need to reduce Apple's cost infrastructure so that we can achieve break-even results at a revenue level of $8 billion." Ideally, the pending acquisition of Steve Jobs-owned NeXT Software will help with this process by saving them some research and development costs. The revenue implosion the company is undergoing has dramatically reshaped its cost structure, making Amelio's main job cost-cutting in an effort to stave off cash depletion. As of last quarter, the company had $1.74 billion in cash and short-term investments.

Amelio's move to bring break-even down to $8 billion highlights the revenue shrinkage problem Apple is enduring. With revenues down to $9.83 billion in 1996 from $11.1 billion in 1995, it appears that 1997 will be another year where Apple sees the topline shrink in double digits. The sequential decrease of 10% in revenues will put the company at about $2.1 billion, meaning that if break-even can be moved to $8 billion at that run-rate, you are looking at profit margins about of about 5% for the full year if they can just stabilize revenue depletion. With 124.5 million shares outstanding, however, these 5% profit margins could yield as much as $3.00 earnings per share (EPS). Apple has become extremely sensitive to the topline, as even a 5% shortfall in this model would have the company earning a big fat zero EPS for the entire year.

When valuing the future cash flows that a more focused Apple Computer can generate, everything hinges on the assumptions that you make. Before today, estimates for this year varied widely and estimates for next year range between $1.25 and $4.00 EPS. Bear Stearns analyst Andrew Neff has since suspended any earnings estimates on the company, rating it "unattractive." Chicago Corp. and Prudential both cut Apple to "hold" from "buy" after today's announcement, decreasing dramatically the number of analysts actually recommending the shares for purchase. While analysts are tripping over themselves to get away from Apple because of the uncertainty, it seems clear to many that the company is not going out of business.

Here at about $18 a share, a dollar above the 52-week low, the company's market capitalization is $2.241 billion. With $949 billion in debt and $1.74 billion in cash and short-term investments, the enterprise value is $1.45 billion, which gives the company an enterprise value-to-sales ratio of roughly 0.17 if you assume the it can make $8.4 million in revenues over the next twelve months. No fan of the Macintosh, the price still seems to be getting quite low for the assets that Apple has. The negative cloud that hangs over the company and the uncertainty about the next few quarters might limit potential upside, but unless the company actually starts to lose substantially more than $100 million to $150 million a quarter, the sucker ain't going out of business. The key question is: Can Apple compete in niche markets efficiently or will it simply go the way of the Dodo? The 40% year-over-year increase in server sales as well as the strength of the PowerMac line implies that the answer might be yes.

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

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