Investing is temporarily being written by guest columnists.
Wall Street analysts hate to say "sell," which is a pity for investors seeking both sides of the story before plunging into a stock. Most of the time, the advice you get from brokerage houses is either to "buy" or to "hold."
There are various explanations of why this is so, some rational, some questionable. A common suspicion is that analysts are subtly pressured by their firms to say nice things about companies that might hire them as underwriters or financial advisers. Another is that analysts tend to move in herds, each fearing to stray far from the consensus.
More likely, the reason is that the stock market has been moving upward with increasing velocity for most the past two decades, and if you take a sufficiently long-term view, selling has been a bad strategy.
In the past five years, certainly, more stocks of reputable companies have gone up than down, but plenty of analysts have suggested that investors buy or hold shares that subsequently lost significant amounts of value.
Sometimes, however, you can find credible differences of opinion that allow you to weigh an investment decision. One current case is Apple Computer Inc., historically important as the first serious maker of personal computers and because of its recent revitalization. If Apple can keep its profits growing, its stock is relatively cheap at the current price of $60.06 1/4. On the other hand, it has tripled since December 1997, and if its growth slows, the stock's best gains may be behind it.
On July 15, Apple drew an "underperform" recommendation from James Poyner of CIBC World Markets Inc., the investment division of Canadian Imperial Bank of Commerce. Yet on the same day, Daniel Kunstler, an analyst at J.P. Morgan Securities Inc., affirmed his buy rating on the shares.
Poyner is predicting that Apple will fall to the mid-$40s in share price, while Kunstler has a $70 price target.
Let's look at the rationales behind these two very different views of the same company. The differences are more of philosophy than of number-crunching, so intelligent investors interested in the stock can listen to both arguments and choose to buy, sell, hold or avoid.
From his office in New York, Poyner said he does not dislike Apple's computers or its management. His outlook that the stock would underperform the market is based on the forecast that Apple's revenue growth would slow to a 5 percent to 8 percent range, down from the 11 percent recorded in the three months through June 26 when compared with the corresponding period in 1998.
Net income will slow even more, he said, because tax credits from the days that Apple bled money are mostly used up. That, he said, should roughly double the company's tax rate, to 25 percent.
Why should Apple's sales slow? Because its flagship consumer product, the colorful, bubbly iMac computer, costs too much, Poyner said, contending that "$1,199 for a machine with no printer and no floppy drive and no Internet service provider is not competitive." Computers based on Intel Corp.'s chip architecture and Microsoft Corp.'s Windows operating system can be had for $300 or $400, if buyers sign up for three years of Internet service with relatively expensive providers.
The iMac is important to Apple. In its latest quarter, the company sold 487,000 of them, up from 182,000 a year earlier (the figure includes a few sales of Performas, a previous Macintosh model). The latest quarter's iMacs accounted for more than half the 905,000 Apple computers sold--but only about a third of the company's dollar revenue, because the professional G3 Power Macintosh line is more expensive.
Even though Poyner said he expected the recently announced iBook portable to help the company's revenue--he especially liked its ability to access the Internet by a wireless interface that is similar to a cordless telephone--he said the kind of sharp sales growth seen since the introduction last year of the iMac would wane because many longtime Apple users have already upgraded to it, exhausting a key source of demand. As well, with the iBook, Apple has filled out the four product categories it has identified, desktop and portable computers for consumers and for professional users. This limits Apple's ability to reach into new markets, according to Poyner.
"The Mac user base has expanded some, but at the end of the day, with good sales of the iMac over the last year, they are still 5 percent of the market, and that is about all they are going to be," he said.
Historically, Apple has been able to charge higher prices for its machines than those on the Windows-Intel standard because people who like or need Macintoshes are willing to pay more for them. Apple therefore has a relatively high gross profit margin--27.4 percent in the latest quarter, compared with just 21.5 percent at Dell Computer Corp., a big seller of "Wintel" computers.
Poyner said Apple was a "relative pig" with that level of gross margin, which measures the cost of making and selling goods in relation to their price. The company, he said, has traditionally concentrated on its margin at the expense of market share, making a lot of money on each computer sold but not selling as many computers as it might if they were not so costly.
With the competing Wintel standard accounting for about 90 percent of the personal-computer market, small software companies do not always rewrite their programs for Apple machines, and many large ones do their Wintel versions first. The perception that there is limited software for Macintoshes discourages buyers, which discourages programmers from writing for it, a vicious circle.
Additionally, Poyner said, there is inconsistency in Apple's marketing. Even though he said he does not believe Macintosh computers are easier to use than Wintel models, he admitted that Apple has succeeded in creating that impression, a pitch aimed at consumers, who generally are more sensitive to the issue than business users. But the "i" in iMac stands for Internet, and if, as Apple portrays it, the computers are mainly meant to be used to get online, the ease of use is of little account. Most Internet viewing is done via a browser program, and the experience is similar no matter what computer you use.
Poyner said he did not think many new users would be willing to pay $1,199 to get a computer whose features were irrelevant to them, even if they do have a choice of five colors.
"The first-time buyer is just extraordinarily price-sensitive right now," he said. Prices will have to come down or unit sales will slow, he added. In either case, Apple's income would be under pressure, and that is bad for the stock, even though it trades at about 20 times the $2.836 it has earned per share from its regular operations in the past 12 months, a modest multiple compared with the 72 times fetched by Dell, which Poyner rates hold, or the 31 accorded to Gateway Inc., which the CIBC analyst has listed as an underperformer.
Even Apple's plan to buy back up to $500 million of its stock, which will have the effect of raising the per-share earnings of the equity that remains outstanding, does not impress Poyner.
That sounds glum, but Kunstler, intending the pun, said from his office in San Francisco that Poyner was "mixing Apples and oranges." Whether or not Macintosh computers are better or easier to use than the competition, "in the mind of the consumer there is a differentiation." It might not be measurable in "speeds and feeds," he said, meaning technical specifications such as processor cycle times, but in "brand image, look and feel, form factor, what have you."
If consumers were as rational as Poyner's rational analysis suggests, Kunstler said, nobody would ever buy a luxury car. "Do you need the iMac? Maybe, maybe not. There are enough people who are saying 'yes' to that question that you have got a market."
Lest you think Kunstler is just one of the Apple faithful, he said he does not own a Macintosh, though he's thinking of buying an iMac later this year for his children, based on its rugged construction and ease of use, the latter an argument he accepts.
As well, he said, the price comparisons with $399 PCs are faulty: "A lot of the cheap ones have strings attached; there is a lot of fine print." When you take into account expensive long-term Internet accounts and the level of performance available from the iMac, he estimated the price advantage for Wintel models to be only "a couple of hundred dollars."
Even if the iMac price comes down, Kunstler said, it is not a given that profit will follow. "That would suggest there is no learning curve." The iMac is only a year old, he noted, and "certain components in there are complicated." Suppliers, he said, improve over time, so it is possible that the component costs will fall along with the price of the iMac, leaving profits unscathed. Apple has been good at controlling other costs as well, he said, noting efficient inventory management.
It also has $2.8 billion in net cash, or $16 per share. Even if it uses $500 million of that to buy in stock, that is a sizable cushion.
Finally, Kunstler said, Apple's four lines "are product categories, not products." Even though the iBook means the company has filled out its "matrix," each of its four categories can be upgraded and perhaps accommodate more than one kind of product. For example, he said he expects the next version of the iMac to have the wireless Internet link of the iBook, allowing owners to move their desktop computer from room to room with only the power cord to hook up.
Kunstler predicted Apple will earn $3.23 a share in the financial year that ends in September 2000. If the market accords it an earnings multiple of just 21.7, far less than that given to Gateway, that meets his $70-per-share target.
Since I spoke with the two analysts a week ago, Apple has jumped to $60 a share from about $54. But even though I am a very happy Macintosh user, I find much of Poyner's argument the more convincing. The history of the technology industry is littered with companies that made innovative and elegant products that were squashed by the inescapable math of the mass market.
While Apple has made a dramatic recovery since Steve Jobs returned to lead the company, I fear that the Mac's place in an Internet-centric world is not assured. Kunstler, however, may have something with the idea that Apple has four product categories, not just product lines.
Within the parameters set by the two analysts, investors can decide how they view Apple. If you see iMacs popping up everywhere at a price not far below $1,199 and the company continues to report fat profit margins, the stock is a buy. If Apple has to slash its price or if it fails to lure new buyers, put your money somewhere else.
Mitchell Martin is the New York correspondent for the International Herald Tribune.
CAPTION: SPLIT ON APPLE (This graphic was not available)