Apple (AAPL)

If customer satisfaction is a good indicator of future growth, Apple occupies the sweet spot. An extraordinary four-in-five iPhone owners (79%) report they're Very Satisfied with their iPhone - a significant lead over number two RIMM (54%) and far ahead of all other major manufacturers.

More over, a survey undertaken by ChangeWave Research, showed that better than one-in-three would purchase an iPhone beating RIM which came in second at 29%.

Additionally, the iPhone is now is over 70 countries and are leaving the 'exclusivity model' seen here in the US.

Apple's vertical integration provides seamless integration and a self-reinforcing business model that has a unique ability to spread the effects of success in one area into others as well. It also can have a multiplicative effect, as in the case of iTunes and iPod: the successes of each amplifies the successes of the other.

Apple's retail stores remain a unique and effective means of reaching new users and encouraging both brand visibility and loyalty. Apple continues to be the best revenue per square foot retailer in the world.

They also capture profit from retail resell margins and let Apple sell third-party peripherals like compatible printers and other drivers that Apple would not otherwise have access to. The company plans to open several high profile stores in the remainder of the year, and its "Store within a Store" concept and increased presence at Best Buy (BBY) stores has grown to 400 locations, with plans to expand into 600 as the end of the summer. Sales growth rates in all regions are strong and once again sales of Macs in Apple's retail stores, 50% of the time, went to first time Mac buyers. That old faithful Halo Effect at work once again. Without a shadow of a doubt, this company is continuing to grow, and grow dramatically, has some very exciting events and products in the pipeline, and has the potential to significantly expand market share in the Computer and Cellphone business segments.

Simply put, customers do come first. Noted from a excerpt from Ms Private Equity - " new Apple owners almost find themselves surprised to own an Apple, seems a common trait among the, admittedly small, sample of Apple owners I have encountered. I've watched four or five people who swore they would never own an iPhone give in, buy them and proclaim, in such similar tones one wonders if The Amazing Alexander works for Apple now ("I loved it. It's much better than PC. I am going to buy it again, and again and again..."), that it is the best phone they have ever owned. And this is where I began to wonder, why the near epiphany in reaction? Now I think I know.

Why this reluctantly amazed reaction among iPhone buyers? Because the definition of "phone" created by hardware and network providers today is so limited. Why have so many Macintosh buyers had the same reaction? Because the conventional definition of "laptop" or "operating system" or "computer" created by hardware and software providers today is so limited. Because these companies hate consumers, hate their desires, hate their needs and, consequently, make sure that the conventional definition of, e.g., "laptop," or "phone" is very limited."

This essay merits your attention on any number of levels, irrespective of whether you are long Apple, merely bullish, or even a bear on the company. While the stock has nearly doubled over the last year, its free cash flow has more than tripled. As a result, a company that is growing at more than 20% per year on the top line is yielding 3.9% on a free cash flow to enterprise value basis.

A significant exposure is the possibility of a consumer slowdown combined with increasingly high expectations. Apple is far more consumer-driven than other tech stocks, and a 40x P/E multiple might not hold up if they only beat by a nickel instead of the quarter investors have come to expect. That’s why free cash flow is so important in this case - it provides a solid backstop, and would help justify being patient through a slowdown should it come. If the company can grow at even half the current rate over the next five years, investors are likely to be well compensated for the added risk.

Apple, Inc has been surprising analysts to the upside for its last four quarters. In March of 2007, analysts expected $0.64 per share, and saw a 36% upside surprise with actual results of $0.87. June, September and December quarters also showed upside surprises of 28%, 17% and 9%, respectively. Current analyst estimates are for March 2008's quarter to be $1.05, and that is an average with 23 published estimates outstanding on this mega-cap growth stock. YOY growth rates appear to be in the 20% plus range, which is well above average and well above industry and sector growth rates. Most of this growth is attributable to the iPod and iPhone lines, which continue to sell well into the marketplace.

AAPL generates over $26.5 billion in annual revenues (trailing 12 months) or $30.50 per share. EBITDA over the same ttm period has been $5.6 billion, and with a debt balance of zero - yes, you read that right - much of that EBITDA falls to the bottom line. AAPL maintains over $18 per share in cash on its balance sheet, or approximately $19 billion.

Apple's multi-pronged approach to product development and its new focus on consumer electronics diversifies its markets, significantly improving its expansion opportunities for the next few years.

The bubble on Apple's stock price has burst. This means that traders are moving on and Apple stock is left as a great investment for the longer-term investors. The stock should be less volatile and less reactive to news than it has been in the past year.

Here is what everyone's missing:

   * The key driver of Apple's growth over the next year will not be the i Phone or even its i Pod (and it certainly won't be i Tunes). It will be Macs.
   * Macs still account for half of Apple's revenue, and except for the relatively tiny i Phone, they are Apple's fastest-growing product line.
   * The Air demonstrates that Apple is still at the forefront of sexy design prowess, which will increasingly be the most important determinant of computer choices.
   * The Windows world is eroding, with more and more companies allowing employees to choose their own PCs.

Bottom line, Apple's Macs are cleared to make even more impressive share gains in 2008. With half of Apple's revenue still derived from Macs, this will have much more of an impact on the bottom line than i Pods or i Phones. Despite the impact of short-term "Mac world effect" bets, in other words, the Apple growth story is very much intact.

the catalyst for a move higher will be upward revisions to EPS estimates. I don’t think they currently account for the immense sales potential of the new iPhone, as well as the momentum in the demand for Macs. Albeit, Apple is giving up the monthly subscription revenue payments from AT&T (T), thus the increase in volume will be coming at a lower margin. This might possibly be why Apple’s shares have failed to respond more positively.

There are a couple things to consider. First, there have been estimates that the new phone’s manufacturing cost is half of the current iPhone. Second, the MobileMe service at $100 per year adds revenue potential associated with the new iPhone. Sales of iPhone applications from Apple’s App store is another avenue to boost revenue. Most importantly, iPhone sales will expose the Apple brand to many who lack experience, and ultimately boost Mac sales.

Apple isn’t cheap trading at 35x FY08 consensus EPS estimates and 28x FY09. It may actually be cheaper if you believe those estimates are too low. I think the estimates are likely too low, thus Apple would be trading at slightly lower multiples. Apple could be bought on any weakness or pullbacks, since Apple’s share price reflects the fundamentals as opposed to pure sentiment, as it did last fall and this winter.

Apple has filed a patent application for the integration of a layer of solar cells below a gadget’s LCD display. Essentially, sunlight passing across, say, the iPhone’s screen could be soaked-up by the solar panel beneath the LCD and then turned into useable power for the phone.

Apple is comining out with a new phone which ought to increase its revenue this year despite the credit crunch

When all is said and done, AAPL shares are a good proxy for taking a position in the current market. If the market moves higher, AAPL share can be expected to do better than the general market; if the market retreats, AAPL shares will not be immune

While the stock has nearly doubled over the last year, its free cash flow has more than tripled. As a result, a company that is growing at more than 20% per year on the top line is yielding 3.9% on a free cash flow to enterprise value basis.

A significant exposure is the possibility of a consumer slowdown combined with increasingly high expectations. Apple is far more consumer-driven than other tech stocks, and a 40x P/E multiple might not hold up if they only beat by a nickel instead of the quarter investors have come to expect. That’s why free cash flow is so important in this case - it provides a solid backstop, and would help justify being patient through a slowdown should it come. If the company can grow at even half the current rate over the next five years, investors are likely to be well compensated for the added risk.