Numbers That Matter, Numbers That Don’t

  • What everyone’s getting wrong about Apple (again)
  • Why two of our editors are still bullish on AAPL, despite the iPhone numbers
  • Chilly economic winds from China cool off industrial (and precious) metals
  • How breaking up the big banks could be great for bank stocks
  • The government that has its own font… prying your IRA out of your cold, dead hands… Trump hasn’t replaced Obama’s IRS commissioner… and more!

Here we go again with the iPhone hand-wringing.

“Nasdaq falls from record high at the open as Apple iPhone sales disappoint,” said a CNBC alert moments after the start of trading today.

After the close yesterday, Apple reported its quarterly numbers. Revenue is up for two straight quarters now, after a slump. Profits are up 4.9% from a year earlier. Nice, huh?

But the company sold “only” 50.8 million iPhones between January and March — down 1% from a year earlier. As we write, AAPL shares are down 1% on the day.

When it comes to Apple, the Street tends to fixate on iPhone sales, and not without reason: Depending on the quarter, the iPhone accounts for up to 70% of Apple’s revenue.

But the number of iPhones sold doesn’t tell the whole story.

Consider this: Revenue from the iPhone is up 1% from a year ago. Turns out a lot of people are willing to shell out $770 (or more, depending on the storage capacity) for the top-of-the-line iPhone 7 Plus — even though it was only an incremental improvement on previous models when it came out last fall.

The average selling price of a new iPhone is now $655. That’s up $14 from a year ago. Sell 50 million of ’em in a quarter, give or take, and that adds up quickly.

Confronted about the decline in the raw number of devices sold, Apple CEO Tim Cook chalked it up to people waiting for the 10th-anniversary iPhone due later this year. “We’re seeing what we believe to be a pause in purchases on iPhone, which we believe are due to the earlier and much more frequent reports about future iPhones.”

Cook knows the anticipation level for the iPhone X (or whatever it’s going to be called) is off the charts. He knows that delivering anything less than a breakthrough product is not an option.

Really, with Apple hovering near all-time highs this year, a pullback is welcome. It makes AAPL’s valuation even more attractive.

“While there’s significant debate about valuations in the tech sector,” says our Louis Basenese, “there’s no way anyone can argue that Apple is overvalued.

“If we back out the company’s estimated $250 billion cash stockpile, it’s trading at a price-earnings ratio of about 12. That compares with the S&P 500 at about 21 times earnings.

“Long story short, there’s plenty more room to run for the stock.”

[Ed. note: Apple’s first-quarter numbers are now in the books. But Louis says there are seven “rigged” stocks set to soar with their own earnings releases — starting in only five more days. And by applying his unique strategy, you can seize on those rising share prices for two or three times your money — in a matter of months. Learn how it works right hereno long video to watch.]

One more thing about AAPL — something our income specialist Zach Scheidt calls Apple’s “secret profit center.”

The fastest-growing segment of the company is “services” — think Apple Pay, iCloud and the App Store. Whatever you spend on apps and games and subscriptions, Apple retains 30%. In the latest quarterly numbers, sales have grown 18% year over year.

“Apple executives know that their services unit is actually the future of this company,” says our income specialist Zach Scheidt. “It has tremendous profit margins. Because the group doesn’t have to pay to manufacture new devices, a much bigger portion of service revenue flows straight to the bottom line as profit.”

Even more important is the reliable, recurring nature of this revenue stream. “As long as there is new music being written,” Zach explains, “Apple will continue to profit from downloaded songs. As long as people continue to use the company’s Apple Pay service, Apple will collect revenue from purchases. The cash flow just keeps coming day after day.”

And imagine how much better it would be for AAPL if corporate tax reform made it through Congress.

Understand… both Louis and Zach are keen on Apple even if gridlock prevails in Washington. But imagine what would happen if companies that keep scads of cash offshore suddenly have an incentive to “bring the money home” with a one-off tax of, say, 10%.

Among Zach’s favorite dividend-paying blue chips, “Apple is positioned to have the most to gain from this Trump tax plan,” Zach tells us. “They currently have over $230 billion of cash held overseas, which could now be repatriated at a 10% tax rate, thus saving the company $57.5 billion.

“Investors are anticipating this windfall could be used for a massive, one-time special dividend or to pay for potential acquisitions. A few companies that could be in Apple’s cross hairs are Netflix, Twitter and even Tesla.”

Several other companies are also in Apple’s shoes, says Zach — doing just fine on their own, but with the potential to do gangbusters if tax reform gets passed. For access to a full list, look here.

To the markets today… where the big movers are the industrial metals.

China’s government delivered disappointing manufacturing numbers overnight. Thus as we write, the price of copper is down 3.5% at $2.51 a pound — as low as the red metal’s been all year.

And that’s dragging down the precious metals, too. Gold is now below $1,250 for the first time in over three weeks. The nearly $20 drop this week can’t be blamed on dollar weakness; the dollar index has been steady since Monday near the 99 level.

The major U.S. stock indexes are all in the red, though not dramatically. The Dow is holding up best, while the Nasdaq is down half a percent.

Imagine this: If Trump really follows through on breaking up the big banks, it’s the best thing that could happen for the big banks’ stocks.

That’s the estimation of Chris Whalen, the newest addition to our team. Maybe you’ve seen Chris on the financial TV circuit. He’s a bond market veteran and author of several books, including 2010’s Inflated: How Money and Debt Built the American Dream. We brought him on board to dive into the profit possibilities of the growing “fintech” — financial technology — sector. But he knows a thing or two about the conventional financial giants, too.

“Most Washington analysts say that the odds of ‘Glass-Steagall 2.0’ being enacted in this Congress remain low,” Chris tells us in a follow-up from an item we mentioned yesterday. “But political support for limiting the risks to the economy of large bank failures remains very strong. As Teddy Roosevelt proved over a century ago, the populist power of attacking the Big Banks is simply too great for President Trump to ignore.”

But how could such a move make the bank stocks more valuable?

Recall the objective of any such legislation — to separate the boring business of commercial banking from the go-go lucrative business of investment banking.

“The investment banking side of the business tends to be much more profitable,” Chris explains. “If, post-Glass-Steagall, investors were given a choice of which half of the broken-up banks to buy, they would always choose the investment banking businesses.

“If you could own just the JPMorgan piece of JPMorgan Chase, including the investment bank and wealth management units, I reckon that this part of JPM would trade for at least twice the multiple it does today, or $160 per share.”

Chris will be keeping an eye on events in Washington, mindful of the right moment to pounce on the opportunity…

The city that gave us the tallest building in the world, an indoor ski slope and an artificial island shaped like a palm tree is now giving us… its own typeface.

Dubai gets own font, but is it your type?

The government of the most populous emirate in the United Arab Emirates developed the font with Microsoft.

Sounds like a perfectly legitimate function of government to us!

“The government communication office says the Dubai Font integrates Arabic and Latin alphabets and is available for use in 23 languages in versions of Microsoft Office around the world,” reports the U.K. Telegraph. Naturally, it will be the default choice in government correspondence.

“I have personally overseen all the stages of the development of this font, from the first design sketches to the execution phase,” says Dubai’s Crown Prince Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum.

Oy… Don’t give Trump any ideas. Can’t you hear him in your head? “We’ve just developed the greatest typeface, the most phenomenal typeface, in the history of the written word…”

“Hands off my IRA,” begins today’s mailbag — an understandable reaction to our exposé and updates over the last week on how Congress might monkey around with tax-deferred retirement contributions.

“They want to tax my IRA and then tax me again to bail out the underfunded public pensions.

“I don’t think so. Not as long as I have the right to bear arms.”

The 5: We share your sense of grievance, and we’re solid with the Second Amendment, but… how exactly do you intend to assert your rights with the arms you bear?

We’re not trying to be flippant here. All we’re saying is that it’s a lot easier to withdraw your consent to be governed by a tyrant if you’ve got lots of other people on your side.

Otherwise, you’re no better off than that poor sap who flew his small plane into the side of an IRS building in Texas a few years ago. He did take out one IRS employee and injured 13 others… but the IRS is still truckin’…

As long as we brought up the IRS: Courtesy of our colleagues at America Uncensored, we learned this week that Trump still hasn’t replaced John Koskinen — Obama’s IRS commissioner.

The “targeting” scandal involving IRS bureaucrat Lois Lerner going after the tax-exempt status of conservative groups began before Koskinen’s appointment… but he didn’t exactly go out of his way to get to the truth and provide redress. A few Republicans in Congress sought his impeachment.

It turns out Koskinen played a role in one of Trump’s first big real estate deals: In 1975, Trump bought the Commodore Hotel in New York from the bankrupt Penn Central railroad. Koskinen shepherded the deal as vice president of the D.C. consulting firm overseeing the sale of Penn Central’s assets.

Small world, no?

“In Monday’s 5,” begins our final correspondent, “the unashamed liberal said, ‘The collective “we” have to decide what we want the government to do and either pay for it or stop asking it to do things we can’t afford.’

“Finally, something I can agree with a liberal on, although I doubt we agree on the things we want them to do.

“In my case, what we want them to do should be as few things as completely necessary. For instance, national defense (not nation building and the endless war on terror) is an important thing that I can’t do for myself.

“Regulation of the border, specifically who we let in the country, is another. For me, that’s about it.”

The 5: Yeah, we’re even more hard-core than that. For the first century or so of the United States’ existence, there was no bureaucracy deciding “who we let in the country.”

How did we the people survive? It’s a wonder any of us is even here to ponder the question…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. Did you play it? Yesterday, Ray Blanco urged Technology Profits Confidential readers to bag a 50% gain on IAC/InterActiveCorp, on news it plans to acquire Angie’s List and merge the site with its own HomeAdvisor.

Not bad for a hold time of less than four months. For Ray’s favorite tech picks of the moment, check this out.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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