Apple Earnings

This Tuesday Apple is reporting second quarter earnings. I have been debating for a while about whether to start initiating a position in Apple in wake of the significant drop in price. If the price of Apple stays at around $390, I will initiate a position in Apple before earnings for the following reasons:

  • Trading at 6+ times this years earnings if you back out the cash. Hopefully, they can at least maintain earnings over the next couple of years.
  • Limited downside. I do not ses Apple stock dropping below $300. If it drops after earnings, it will allow me to buy at a cheaper price.
  • Low expectations this quarter. Verizon and Cirrus Logic’s results gave investors a peek into what will be a bad quarter by Apple’s standards.
  • Rampant negative sentiment on Apple shares.
  • Apple should announce what they plan to do with its cash pile very soon if not at earnings announcement. A $15 dividend would give the stock a yield around 4%.  A preferred stock would give the biggest boost to the stock price. However, I do not think this will happen.
  • Investors will start focusing on what’s next for Apple after the earnings report. Historically, this is when the stock makes a run. There are plenty of concrete things to look forward to: iPhone 4s, cheaper iPhone, iPhone introduction on China’s largest mobile network, China Mobile.
  • Even talk of potential new products whether it be a tv or watch could be a catalyst to the stock price.
  • Over the next couple of years, a lot of iPhone users 2 year contracts will be expiring which should give a boost to iPhone sales.

What’s preventing me from buying a ton of shares of Apple?

  • Limited upside. I do not see the stock going above $500 in the near term. It is now a value stock as opposed to a growth stock. 
  • Half of revenue dependent on iPhone.
  • If the stock price drops even further it will allow me to buy more shares.

Commonwealth

Commowealth (CWH) board is still battling hedge funds on control of the company. I own a small amount of shares I bought during the financial crisis. There was a good article in barrons this week recapping the battle. I urge any significant holders of the stock to join the battle against the board.

Orchard Supply Hardware Stores

Orchard (OSH) crashed after it hired restructuring lawyers. It trades below $2 now. I shorted at $14, but had to cover once it went below $5. I am still short the other spinoff Sears Hometown (SHOS). However, my brokerage made me cover some shares recently. A lot of value investors are bullish on Sears Hometown, but I have yet to be convinced.

Disclosure: I own CWH 

Harvard Bioscience spinoff of HART

Harvard Bioscience (HBIO), “a global developer, manufacturer and marketer of a broad range of tools to advance life science research and regenerative medicine”, is spinning off its subsidiary, Harvard Apparatus Regenerative Technology, Inc. (HART). HART, a regenerative medicine company, has no revenue and will use to proceeds to general corporate expenses. 

Here are the details of the spinoff:

  • Selling 1.7 million share at a range of $10-$12. Underwriters also have the option of exercising an additional 255,000 shares at the IPO price.
  • HBIO will own over 80% or 8 million shares after the IPO.
  • HBIO plans to distribute the shares to shareholders 4 months after the IPO.

Financials

HBIO is a $168 million dollar company. In 2012:

  • Its net income, if you exclude discontinued operations, was $1.5 million.
  • Amortization of intangible assets amounted to $2.7 million
  • Expenses for HART were around $6.7 million. HBIO will earn around $4.6 million at the current tax rate after HART expenses are wiped off the books.  

After the HART IPO, HBIO looks to have about $9 million in FCF. If we value it at 10 times FCF, HBIO will have a value of $90 million. The 8 million shares HBIO will own after the IPO will be valued at $88 million if HART IPOs at $11/share. 

So, the total sum of parts value of HART is around $178 million. It is not that undervalued. However, a lot of it depends on the price of HART. I will keep an eye on both of these stocks after the IPO to see if there ever a huge value discrepancy.  

Disclosure: I do not own any of the stocks mentioned.