Analyst: Lack of clarity at Apple warrants ‘sell’ rating

“For all of its terrific marketing, superb products and highflying stock, there’s another side to the revival of Apple Computer that gets less airplay: Its lack of a certain type of disclosure.,” Herb Greenberg reports for MarketWatch. “With the exception of analyst Robert Renck, nobody seems to care. Renck, of the private research firm R. L. Renck & Co., may be the only analyst to rate Apple a ‘sell.’ Among the reasons: the sparse way in which it breaks out operating results of its segments. Renck, who prides himself on knowing his way around the dark alleys of financial statements, has a knack for questioning the status quo of Wall Street darlings. His earlier targets include McDonald’s, before investors realized how stale it had become, and CUC International, before it was acquired by – and became a major headache for – Cendant.”

Greenberg reports, “While not predicting a similar fate for Apple, Renck believes the company’s skimpy segment disclosure makes it a ‘have-faith, trust me’ stock. As a result, he has warned his clients, Wall Street’s bullish forecasts aren’t without risk for this simple reason: Analysts can’t get a true and complete picture of how Apple makes its money. ‘I don’t think Apple is doing anything wrong other than their penchant for secrecy,’ he says.”

“Renck goes so far as to say he believes Apple should do a separate breakout for computers, iPods, music-related products, peripherals and software and service. ‘Their business has changed and they should be doing it differently,’ he says. ‘Transparency is what everyone wants, and they don’t want to be transparent,'” Greenberg reports.

Greenberg reports, “On a recent earnings conference call, several analysts specifically asked about the iPod’s gross margin. Finance Chief Peter Oppenheimer responded to one, saying, ‘… Our competitors would just love to know what our specific gross margins are … and we just don’t want to help them.’ While that is understandable, Renck doesn’t believe it is necessarily right. ‘Without clarity,’ he argues, ‘analysts can’t forecast with any degree, other than to rely on what management says.'”

Full article here.

[Thanks to MacDailyNews Reader “Jim” for the heads up.]

MacDailyNews Take: So, Apple should risk hurting themselves by disclosing information that their competitors could use in order to appease the Wall Street charlatans, er… analysts? Because Apple has a responsibility to shareholders, if it’s legal, the company should do what they can to be as competitive as possible. What’s really crazier, Apple not breaking out separate products in product categories or rating AAPL stock a “sell” for no sound financial reason?

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  1. He wants Apple to disclose facts that would make his guesswork easier and cut his margin of error!

    Don’t change a thing Apple, you have survived through the lean years with the same principles, and no one gave a flying fkcu then, so why change now to suit some Bozo, who want it all given to him on a plate.

    Bugger off Robert!


  2. Uh MDN, there was a sound financial reason – lack of clarity in the financial results. If you don’t mind the “have faith” label of the stock and Renck put it, then hold on. He’s one for more transparency and hence he labels it a “sell” by his standards.

    Pretty straight forward.

    There have been other Wall Street darlings that pulled the same thing. I’m sure you can name them. Hopefully you never invested in them or sold at a profit.

    theloniousMac – yes, what you put is lack of business clarity (but certainly not a lack of clarity in it goals). Every company strives to improve and be better. Is that a reason to invest?

  3. As an investor I want as much info as possible. As the analyst points out, the rules, as they now exist, allow for the hiding a company’s problem areas.

    Stockholders have a right to know about a company’s problem areas as well. Perhaps there are problems with the current reporting methods.

    Perhaps Apple is just taking advantage of faulty reporting rules.

  4. Let´s look at it another way –
    If Apple computers were making huge profits and the iPod dept was making huge profits….in fact if every dept. of Apple was making huge profits and each product, too (macmin, eMac, etc) then Apple would gladly show the world how great each product and dept. is doing.

    But each product is not profitable (macmini) and sales are not that great for each product (macmini, eMac, shuffle, powerpc desktops, etc). So Apple wants to hide all the losers and non-profitable products/depts under a cloak of “Apple is profitable”.
    When in reality Apple should let stockholders know that “the iPod dept. is profitable, the computer dept. not.” If stockholders knew that there would be calls for explanations – which Steve can´t give, people wondering why market share has dropped in the last 4-5 years despite all the hype and circumstances Steve has laid forth, etc,etc. By hiding all this Steve does not have to answer stockholders.
    People that invest want/need lots of information to judge for themselves to invest or get out of the stock. Apple hurts itself by not being more transparent and so secretive. All it will take is one not so good quarter and the big investors will run for the hills, sell,sell,sell.
    Apple stock has been stuck in a small trading range the last six months and will stay that way for the foreseeable future.

  5. “no sound financial reason”

    Clearly MDN wouldn’t know a financial reason it it bit them on the arse.

    One sound financial reason is so that your investors, who after all own the company, not Steve (although he is also one), can see how it’s doing in various areas.

    Company valuation, especially for a stock like Apple which is valued as high as it is because there is a big expectation of future growth do need to assure people that that growth is likely to happen to justify the valuation.

    For example, if Apple grows at 15% every year for the next 10 years, all other things being equal it’s worth maybe what it sells for now.

    If it grows at 20% year on year it’s worth perhaps $90.

    If it grows at 10% every year, it’s worth perhaps $45

    If it generates no growth at all, it’s worth perhaps $25

    So understanding where the money will come from in the future is key to valuing this company.

    Not disclosing that will lead people to speculate. Some will speculate that Apple will do outrageously well, and get the $90 number.

    Others will speculate that the iPod wave has peaked, and get the $25 number.

    So don’t beat up the analyst. All he’s saying is that no-body’s giving him any reason to believe that Apple will hit those high growth numbers required to drive the price up.

    Also one key thing to remember is to learn to distinguish between a great company and a company which is a great buy at it’s current stock price.

    There are many great companies, with bright futures which are nevertheless overvalued.

  6. This is utter bullshit!

    If I were to try and find out how many Thinkpads that Lenovo have sold by model type or HP systems or Gateway, I couldn’t find that info in a month of Sundays.

  7. I wonder if Apple’s auditors cite lack of clarity in their Financial Statements? Of course the auditors have access to the answers to their questions but if they find the published results are not materially misleading then you have to wonder how much more detail does Renck need? I haven’t looked at Apples published financials but you have to know that they must conform to SEC standards for a publicly traded company. They’re also subject to annual audits which, granted, may not hold the psychic security value it once did, pre-Enron.

    What Renck specifically cites is the iPods Gross Margin. Revenues less Cost of Goods Sold equals Gross Margin. So, what the analysts really want to know is how much does the iPod cost Apple to make. Everything after that is operational expenses (fixed and variable costs), depreciation, amortization, etc. That would be an intersting piece of information to have but I’m not sure I would base a sell rating on one piece of the puzzle like that.

  8. stockboy,

    All sounds great, if your facts were true, but, they’re not.

    Apple’s computers in both categories which they report, “Desktops” and “Portables,” are growing and have been for some time.

    Remember: Apple was profitable before there ever was an iPod.

  9. without getting personal, theloniousMac writes about a 5 point plan and is 100% correct as this relates to a strategic plan. it is not however a financial forecast. Apple could accomplish these things but lose a penny a unit. (and before you tell me they won’t, please share your insights into interest rate and foreign exchange rate changes, cost of raw materials & labor etc). Also, tell me who the major players will be in each market 5 years from now, remembering that 5 (6?) years ago there was no iPod, no iLife and no iReason to think there would be.

    Volume + cool products do not equal profit and a great company does not always have a great stock. I’m not saying that I think
    AAPL won’t be profitable. I’m also not saying that I’m not prepared to buy at $60. But in any financial calculation (best made without emotional interest) there is a ratio of risk to reward. Perhaps withholding information increases the potential reward by keeping competitive data out of the hands of the other players but it absolutely increases risk by keeping data out of the hands of investors.

    This guy may be wrong but it’s unfair to call him stupid, ignorant or evil.

    2 cents poorer.

  10. Stockboy, a single product in a mix doesn’t have to be profitable as long as the product yields a positive contribution margin. If you remove the product that isn’t performing the remaining products have to absorb the remaining fixed costs.

  11. Apple didn’t make it’s comeback worrying about investors and appearing squeaky clean to analysts – they did it through sheer bloodyminded inventiveness.

    I can’t see that changing – and why should it?

  12. “People like him no allegiance at all save one–how much money is in their pocket. They support no ideals beyond the green ones.”

    People like him should have only two allegiances, the first to how much money is in his client’s pockets, and second, to increase that money using ethical methods.

  13. Apple’s reason for being is to enrich their owners (investors). Nothing else. It does this buy selling great products at profitable prices but that’s secondary — making dough is why they exsist.

  14. Bill: “Stockboy, a single product in a mix doesn’t have to be profitable as long as the product yields a positive contribution margin. If you remove the product that isn’t performing the remaining products have to absorb the remaining fixed costs.”

    Bill, you are genius; I am sure you truly believe it. But what if the entire computer side of the house is not profitable and is riding on the coat tails of the profitable iPod. On the surface all looks fine because Apple reports a profit, but what if in reality the foundation of Apple (computers) is potentially dragging the company under. That is news investors want to know. As it is now, one does not know it.

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