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Is Apple The Next Polaroid?

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Someday maybe, but certainly not right away--and not before U.S. Steel, General Motors, and Citigroup--even Apple may succumb to the Grim Reaper.  I’m taking the dark side, because I remember the Polaroid comet, its slow descent and then, suddenly, going to black. Growthies rarely last a decade.

During the early sixties, Polaroid, and then Syntex, made me rich when I played them with six-month out-of-the-money calls.  Rich, in 1961, was anyone with $500,000.  Edwin Land, Polaroid's demanding, irascible, headman once told me in an aside that he couldn’t keep his researchers out of the dark rooms as they struggled to perfect instant color film.  He, too, was rubbing his eyes.

Polaroid’s instant color film was an event heralded by Land (with Steve Jobs’s panache).  His demo compared favorably with intros of the iPhone and iPad.  Land predicted every living person on the planet earth before long would have his picture snapped by a Polaroid camera using instant color film.  Jobs felt the same way about iPhone’s universality.

Land wasn’t exaggerating by much, but over ensuing years Polaroid ran out of new toys to sell.  The company hardly reacted to Canon and Nikon’s fielding 35 mm cameras while photo finishing advances cut film development from 4 hours down to 1 hour.  Polaroid was losing heart muscle long before digital cameras, coupled with personal computers printed out gorgeous 8½ x 10 color prints tout de suite.

Apple sells at what looks to me like a price earnings ratio of 10 times calendar ’12 earnings.  This valuation is substantively lower than U.S Steel, Union Pacific Railroad, Caterpillar, even Citigroup and JPMorgan Chase.  Maybe General Motors is cheaper, but GM truly saw the wolf at the door in 2008 – ’09.

Just confining ourselves to tech houses, IBM, Intel, Cisco Systems, EMC, Oracle and Google seem pricey compared with Apple.  None of these properties is without problems ahead in terms of renewing themselves, maintaining profit margins and share of market against feisty competitors.

Polaroid had to deal with Japanese digital camera makers.  Apple contends with Samsung and Amazon,com who compete on price.  Google’s Android system for smart phones now holds dominant market share.  The contention is whose footprint will be larger in the smart phone advertising market about to unfold.

Wall Street celebrated Apple’s awesome year-end numbers with an initial 8 percent stock price burst, now 6 percent.  Meanwhile, Google’s quarterly earnings miss schmeissed 8 percent off its stock price, a snappy fifty plus point reaction.  In the previous quarter Google posted an upside surprise and was rewarded with an 8 percent or so accretion.  The going rate for big surprises on the Street is 6 to 8 percent both ways.  Look at Amazon.

Apple’s and Google’s numbers, 180 degrees divergent, made me anxious.  After all, I don’t fly to China and South Korea to count iPads and iPhones moving out the door.  The Street contains dozens of analysts who claim they monitor product pipelines, parts reorders, even supplier cancellations.

This is a myth that Apple’s quarterly numbers laid to rest.  iPhone sales, at 37 million came in 5 million units above consensus.  As for the iPad, it hit 15.4 million units, some 25 percent above consensus.  Earnings, naturally, beat quarterly projections by almost 50 percent.  This makes Wall Street research models look like a child’s doodling.

Analysts dashed to their keyboards and snappily republished new earnings numbers, around $41 a share for calendar 2012.  I could easily stretch this to $45, which puts Apple at 10 times earnings or what U.S. Steel might sell for in a good year.  Right now, X is losing money, but money managers are betting the worst is over and Steel earns $4 a share in 2013.  X is 50 percent above its recent months’ low.

¿Quién sabe? This is a leveraged capitalization.  Right now, there is plenty of stretch in steel capacity, an industry with excess worldwide capacity for as far back as I can remember.  Only a surging recovery in worldwide GDP next couple of years makes me wrong.

My anxiety over newly issued quarterly earnings reports runs deep.  Too many misses on big capitalization properties, both up and downside.  Analysts and money managers are forever on the outside, looking in.  Me, too.

Quarterly conference calls by management have turned into stylized show and tell sessions, where honchos play down good numbers and suggest any disappointments will be short lived and readily explainable.  I never heard of a retailer who didn’t blame his bad report on the weather, so I’ve stopped listening.

You would think big money is capable of handicapping the 25 largest companies by market capitalization.  Trainloads of analysts and money managers shine 1,800 watt spotlights on Exxon Mobil, Apple, General Electric and its ilk, but it ain’t necessarily so.  When I scrolled down the S&P 500 Index I was shocked over how badly even my earnings and topline models missed the mark.

In fact, I couldn’t even get the top five properties close to actuality.  I did bet right that Exxon Mobil would miss the analyst consensus, because refining and marketing margins came in for the fourth quarter.  But, Apple, Microsoft, even IBM easily topped consensus numbers.  GE missed some on its topline while Google’s revenue line was a huge disappointment, ditto earnings, even after taking out non-recurring lines.  Google tells you next to nothing so I hate them though locked in.

Below the top 10, AT&T was light while Wells Fargo posted respectable results.   Oracle shocked the tech analyst fraternity with light numbers on the topline and in its earnings.  Intel surprised nicely although analysts had lined up to worry me to death.  JPMorgan’s quarter was noisy, again, not exactly rosy.

McDonald’s came through with great topline strength worldwide as did Schlumberger whose stock bounced 10 percent the past couple of weeks.  Why not?  With WTI oil sitting at par or better, worldwide deepwater drilling should be a long cycle phenomenon.

There are deep basics hidden in these divergent quarterly reports.  Technology analysts largely missed the slowdown in information technology spending, particularly hardware.  In banking, it’s still too early to project normalized revenue growth or any pickup in net interest margins.  The fallout from litigation and write-offs over mortgage backed securities abuses is far from resolution.

Non-durables consumer properties like PepsiCo, Procter & Gamble, even Johnson & Johnson and Coca-Cola face headwinds from our stronger dollar, year over year, and puny topline growth.  The market is in the mood to play leveraged earnings power properties like Caterpillar, Boeing, General Motors, even U.S. Steel and iron ore producers like Vale.

The big bet on playing early cyclicals, or any kind of cyclical is the Federal Reserve Board prevails with massive monetary stimulus for years to come.  Our economy then reflates to maybe 2.5 to 3 percent GDP momentum.  I like the odds for a resurgence of industrial earnings power.

Tech is OK because valuation for most properties remains below the market’s multiplier of 13 on a hundred bucks of earnings power this year.  I no longer worry about massive shrinkage in operating profit margins for the Heartland.  My horse in energy remains Schlumberger.

Apple, as a stock, needs to see meaningful shareholder largesse from management.  Ten bucks in dividends, annually, for a start.  Guys, don’t just throw us a bone.  Why isn’t the board all over this issue?  Asleep?

My gut wrenching over Apple as a stock is that if this were 1968 or even 1972, Apple would be selling at 30 to 40 times earnings, along with Polaroid, Xerox, Syntex and Fairchild Camera.  Even First National City (Citigroup) sold at 20 times forward earnings then.  I’m just what my Jewish grandmother opined:  “He’s comfortable, but with no yacht and race horses as yet.”

Years after Syntex’s share of the birth control market stood diluted by several pharma houses, I sat with its headman in his sunny office in southern California.  He pointed to the courtyard where a gorgeous reclining nude sculpture in bronze by Henry Moore basked in the sun.

“That’s the best investment we’ve made in the past 10 years,” he said. “Not our acquisitions.”

Martin Sosnoff: mts@atalantasosnoff.com

Martin T. Sosnoff is chairman and founder of Atalanta Sosnoff Capital, LLC, a private investment management company with $8 billion in assets under management. Sosnoff has published two books about his experiences on Wall Street, Humble on Wall Street and Silent Investor, Silent Loser.  He was a columnist for many years at Forbes Magazine and for three years at The New York Post. Sosnoff owns personally and / or Atalanta Sosnoff Capital owns for clients the following investments cited in this commentary: General Motors, Citigroup, Apple, Union Pacific, Caterpillar, JPMorgan Chase, IBM, Intel, Cisco, EMC, Oracle, Google, Amazon, ExxonMobil, General Electric, Microsoft, Intel, McDonald’s, Schlumberger, Johnson & Johnson and Boeing.