Category Archives: oud

Find Businesses That Control Their Destinies

By Frank Caruso, James T. Tierney, Jr. In a volatile world, it often feels like companies are subject to forces beyond their control. Finding companies that can steer their own course is a good way to capture resilient growth through changing market conditions. Not all companies are equally vulnerable to unpredictable market forces. Some exercise a much greater degree of control over their fate by virtue of having fundamentally sounder businesses based on stronger people, better products, superior operating execution and more responsible financial behavior. Searching for companies that command their destinies is one of several ways that active investors can capture excess returns over long time horizons. Balance Sheets Matter Balance sheet health – and low earnings volatility – is a great indicator of resilience. Investors should always scrutinize a company’s balance sheet, but in times of stress, this is even more important. Companies with less debt to service will pay less of a penalty in their financing costs when interest rates rise. Low debt ratios also are good indicators of a company’s flexibility to execute its strategy without relying on banks or credit markets. And businesses that can generate the cash they need to fund and invest in their operations are less beholden to the demands of externally sourced capital, and less vulnerable to a potential tightening of credit markets. Solid balance sheets and sustainable sources of growth are a winning combination. Companies with both are much better equipped to reward shareholders by increasing their dividends or buying back shares – even in tough market conditions. Companies in the top quintile of share repurchases – especially those with attractive valuations – have outperformed the market historically ( Display ). Click to enlarge Focus on Pricing Power Pricing power is another indicator of a company’s ability to deliver sustainable growth. With China and emerging markets slowing down, and with anemic recoveries in countries from the US to Europe, it’s difficult to find sources of new demand. And with inflation stuck at very low levels, it’s not easy for companies to raise prices. So companies that demonstrate pricing power in their industries are better positioned to improve their earnings than are their competitors that lack it. We think there are three keys to pricing power: innovation, competition and cost and inflation dynamics. Innovative products and services are capable of commanding higher prices even in a tough economy and amid low inflation. For example, Apple (NASDAQ: AAPL ) commands premium prices for its smartphones because of its innovative features and an ecosystem that allows all the company’s devices to work together seamlessly. A highly competitive environment makes it much more difficult for companies to raise prices. And in a low-inflation world, cost dynamics are crucial. Given this reality, we believe that companies with strong market positions and relatively fixed cost businesses are better placed to increase revenues while leveraging costs. For example, Visa (NYSE: V ) and MasterCard (NYSE: MA ) are the two largest global card networks. As such, they have had the ability to modestly increase prices over time while competitors have seen price erosion. And the nature of their networks means that additional transactions or volumes are highly profitable from an incremental margin perspective. Understanding these dynamics can help underpin an investing plan for an unpredictable world. Investors in passive equity portfolios may be more exposed to capricious market forces because they will hold many benchmark stocks that are more vulnerable to instability. In contrast, in our view, active equity managers can target companies with clear advantages in confronting erratic headwinds – and controlling their destinies – which can lead to resilient long-term returns. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Frank Caruso, CFA, Chief Investment Officer – US Growth Equities James T. Tierney, Jr., Chief Investment Officer – Concentrated US Growth

Apple Stock Dives After iPhone Sales Fall For First Time Ever

Apple ( AAPL ) late Tuesday reported its first-ever year-over-year decline in iPhone sales and its first quarterly revenue drop since 2003. To soften the blow, Apple increased its dividend and share buyback plan. CEO Tim Cook also said business was “healthy” and that Apple has an “amazing” product pipeline. But the stock still fell nearly 8% in after-hours trading following the earnings release. During the regular trading session Tuesday, Apple stock fell 0.7% to 104.35, closing just above its 50-day moving average. Key iPhone chip suppliers Broadcom ( AVGO ), NXP Semiconductors ( NXPI ) and Skyworks Solutions ( SWKS ) also fell after hours. For its fiscal second quarter ended March 26, Apple earned $1.90 a share on sales of $50.6 billion, both missing views. On a year-over-year basis, earnings per share fell 18.5% while sales dropped 13%. Analysts polled by Thomson Reuters expected Apple to earn $2 a share on sales of $51.97 billion in the March quarter. Apple topped estimates for iPhone sales in the quarter, but still saw a sharp drop. It sold 51.19 million iPhones in fiscal Q2, down 16% from a year earlier. Financial analysts on average were looking for Apple to sell about 50 million iPhones during the March quarter. Greater China sales, including Taiwan and Hong Kong, tumbled 26% to $12.49 billion, after soaring 71% in the year-earlier quarter. For the current Q3, Apple is targeting overall revenue of $42 billion, based on the midpoint of guidance, which is well below estimates. It did not give an EPS target. Wall Street was modeling for Apple to earn $1.76 a share, down 5%, on sales of $47.32 billion, also down 5%, in the June quarter. $50 Billion For Shareholders Apple said its board authorized an increase of $50 billion to the company’s program to return capital to shareholders. Under the expanded program, Apple plans to spend a cumulative total of $250 billion of cash by the end of March 2018. As part of the updated program, the share repurchase authorization was raised to $175 billion from the $140 billion level announced last year. Apple also increased its quarterly dividend by 10% to 57 cents a share. Apple has signaled a hiring slowdown by cutting all of its contract recruiters in recent weeks, VentureBeat reported Monday . It also is laying off some full-time recruiters as well, the news website said. In all, more than 100 people were impacted by the moves. Gross Profit Margins Declining Apple’s gross profit margin dipped to 39.4% in Q2 vs. 40.8% a year earlier. Apple expects its gross margin to decline again in the current quarter, to 37.5%-38%. CEO Tim Cook described Q2 as a “challenging quarter.” “Despite the pause in our growth, our results reflect excellent execution by our team in the face of ongoing macroeconomic headwinds in much of the world and difficult year-over-year comparisons,” Cook said on a conference call with analysts. Apple faced currency weakness in most of its international markets. In constant currency, Apple’s revenue declined by 9% year over year, Cook said. Despite the decline in iPhone sales, Apple’s smartphone business remains “healthy and strong,” Cook said. Apple continues to see a high level of people switching from Android smartphones and other platforms, he said. Apple’s iPhone business accounted for 65% of the company’s total revenue in Q2. Apple also saw declines in its iPad and Mac computer businesses. Sales of iPads declined 19% in units and revenue in Q2. Mac sales fell 12% in units and 9% in revenue in the March quarter. Cook hinted at exciting products ahead. Analysts believe Apple is working on an electric car and an Internet TV service, among other things. “The future of Apple is very bright,” Cook said. “Our product pipeline has amazing innovations in store. … We are forging ahead with important investments in research and development, in our infrastructure and our supply chain. We’ve made 15 acquisitions in the last four quarters to accelerate our product and services road map and we’re always on the lookout for companies with great technology, talent and strategic fit.”