Taking Some Profits in Apple

Shares of Apple (AAPL) rose nearly $5 today to close at more than $188 per share. The company is faring very well during an overall weak time for consumer spending, thanks to a strong product lineup, and Wall Street is excited over the prospects for the company's forthcoming next generation iPhone.

This overall bullishness is the polar opposite scenario we saw back in February when I wrote that Apple's Valuation Looks Attractive Again amidst worries over a consumer-led recession and a lapse of new product introductions from the company. Since then the stock has soared from $119 to $188, for a gain of 58%. As a result, the shares have gone from very compelling from a valuation standpoint (22x 2008 earnings estimates) to fairly valued in my eyes (34x 2008 earnings estimates) and accordingly I have been taking some chips off the table at current prices.

Apple Stock Performance - 2008 Year to Date

This is not to say the fundamental outlook for Apple has changed (it hasn't), just that the stock no longer looks extremely undervalued as it did several months ago. The company remains a reasonable core technology holding in my view, just no longer in any significantly elevated portfolio weighting.

Full Disclosure: Long shares of Apple at the time of writing, just in less quantity than before

Citigroup First Quarter Update, As Promised

JoJo writes:

"Now that Citigroup has posted its first quarter earning for 2008, do you still stand by your original analysis, or you think you have to revise it?"

Thanks for getting my butt in gear for the update I promised, JoJo.

As many of you may know, Citigroup (C) reported a loss of $5.1 billion in the first quarter, which hardly makes it easy to figure out what a more "normal" quarter would look like for them. While the losses and writedowns did go down in Q1, versus Q4, there is still plenty of cloudiness in Citi's results.

Nonetheless, there is no point in shying away from digging through the numbers, even if they are complicated, which is why I even bothered writing about Citi in the first place. The first thing I did was update my spreadsheet showing Citi's quarterly income results by segment going all the way back to 2007. This allows us to see the trend for the last five quarters. Then I added my prior forecasts from February (For those who don't recall, I projected three scenarios -- conservative, moderate, and aggressive -- each trying to pinpoint the possible earnings power for Citi post-credit bubble). Here is the data:


Now, let's go through it. As you can see, the biggest obstacle to valuing Citi is the Markets and Banking segment. That division lost $5.7 billion during the first quarter, which accounts for all of Citi's total loss and then some.

It is going to take some time to really pinpoint if my projected "normal" profit range for the investment banking operations of ~$2-$4 billion is accurate. The reason is that much of the losses right now are one-time events, not recurring costs of doing business.

For example, Citi wrote down $3 billion in Q1 just on auction rate securities and monoline insurance exposures. That accounts for more than half of the investment bank's losses for the period, but those issues won't be around long term, as they are simply due to the recent credit crunch. As of right now, I'm sticking with my estimates for the investment bank, as nothing we know now leads me to think they can't earn several billion in say, 2010.

As for the other segments, the numbers are actually not that far off. The International Consumer division's trailing twelve month profit figure is right in between my moderate and aggressive forecast. U.S. Consumer is clearly strained right now, though they are not too far off from my numbers ($6.5 billion in profit for the past year, versus a conservative estimate of $7 billion). Global Wealth Management is also not too far off, so all in all I don't see the need to change much right now.

Now, you may be asking why I am using trailing twelve month profits rather than annualizing the latest quarter. Well, I'm thinking that just as 2006 and early 2007 profits were overstated due to the credit bubble inflating, the results from Q4 2007 and Q1 2008 are understated due to the extreme strain in the credit markets. By using a rolling four quarter average, I can get a better idea of what an entire year might look like rather than extrapolating just three months. That said, this formula isn't perfect either, and we will see a lot of volatility as the strong numbers from 2007 are anniversaried.

Full Disclosure: No position in Citigroup at the time of writing

Microsoft Played Brilliantly, Hands Off Negotiations to Yahoo Shareholders

This blog has been rather quiet recently, but things should pick up shortly. I am in the process of relocating and other things have limited my time lately.

This Microsoft (MSFT), Yahoo (YHOO) story just can't get any more interesting. Now that MSFT has walked, what can we expect? Well, YHOO's management team looks like fools, not only for misplaying their hand, but also for taking very lightly their fiduciary duty. Expect YHOO shareholders to revolt. I would not at all be surprised if YHOO is forced to do the deal, because the board really can not say anything to shareholders that remotely convinces them that the company is worth $37 per share or more. When the market thinks you are worth about $20 and someone offers you $33, you take it. End of story.

Even if MSFT really is out for good, this whole thing will help YHOO because it will have to work hard to make meaningful changes now that they balked at such a great buyout offer. The problem is that morale at Yahoo is probably at rock bottom right now, so any sense of renewed independent creativity is easier said than done.

I am still pretty surprised a deal did not get worked out by now, but I don't think we've heard the end of it. If a deal does get done at some point this year, there will likely be an excellent entry point for MSFT created, so investors should keep that mind as this saga continues.

Anyway, the blog will get livelier soon, you have my word on that.

Full Disclosure: Long MSFT and YHOO at the time of writing