How Apple Could Save the Economy

It was a wild weekend here in Baltimore. I actually took my kids out of town to visit the grandparents in Richmond, VA.

Everything seems back to normal after six Baltimore police officers were indicted for a death that was ruled a homicide.

There’s a huge number of topics to cover today, so I’m breaking out the “random thoughts” format for you…

• Networking giant Cisco Systems (NASDAQ: CSCO) announced it has a new CEO. Chuck Robbins will take over for superstar John Chamber on July 26.

I will miss John Chambers. He was one of the best CEOs out there. He was very candid about how global economic conditions affected Cisco, and because Cisco is heavily dependent on corporate IT spending, his quarterly assessment of corporate spending had ramifications far beyond Cisco’s business.

To investors, Chambers was a tech leader and global economic guru. His insight literally moved the market.

That’s not to say he didn’t make mistakes. His consumer camera division — sort of an early version of the GoPro — was a huge failure and cost the company billions. But if you’re not making mistakes, you’re not trying.

Cisco started paying a $0.24-a-share annual dividend in 2011. Today, that dividend has grown to $0.84 for a yield of 2.9%. But there’s still a lot of upside for that dividend. Cisco generates around $12 billion a year in operating cash flow, and it banks $8 to $9 billion in profit a year — more than double what it pays in dividends. It also has ~$53 billion in cash.

So it’s a pretty good bet that Cisco can hike that dividend ~25% a year. And the stock is pretty cheap, with a forward P/E of 13, so it’s a good bet to give you 20% annual returns as well. I also won’t be surprised if the company is holding back some positive news for the new CEO. If Cisco shares dip on concerns about the end of John Chambers’ tenure, or after May 13 earnings, it’s a good time to buy.

• I’ve been pretty harsh on McDonald’s (NYSE: MCD). But when you miss earnings for six straight quarters, that’s what you get. The new CEO announced a turnaround plan this morning, but it seems to focus more on efficiencies within the business than changing the actual product.

I think the product is the problem: McDonald’s just doesn’t serve a very good burger — not when you compare it to competitors like Five Guys, Shake Shack (NYSE: SHAK), or Habit (NASDAQ: HABT).

As much as I think the business has problems, I am more concerned about the stock price. Six quarters of earnings misses and a 15% decline in earnings last year, and the stock is still just 10% from all-time highs. The forward P/E is 19! More expensive than Cisco, with way more question marks about its future.

McDonald’s has basically traded between $90 and $100 for four years. Investors are cutting it way too much slack. I think it heads lower.

• I’m also quite bullish on the other burger chains. Shake Shack’s expansion plans seem to be going well. Can’t buy that stock at current prices though; it’s just too expensive, trading at seven times revenue. Habit, on the other hand, is a much better deal, at 2.6 times revenue. Same with Good Times Restaurants (NASDAQ: GTIM), at 2.5 times revenue.

Americans are spending more money than ever on eating out. And I will not be surprised if McDonald’s buys out one of these up-and-coming chains to give itself a little boost.

• Oil prices are pushing $60. Inventory builds have been less than expected, and drilling rigs continue to be idled. Oil company earnings are right around the corner. My favorite oil trading stock — Oasis Petroleum — reports on Wednesday. I recommended shares to my Real Income Trader subscribers around $14, and we’ve sold two rounds of covered calls on the stock, totaling $2.35 a share. Our gains right now are $6.35 a share, or around 45%.

I have no idea what Oasis will report for the quarter. Are expectations low enough that oil companies can beat? Or has the recent rally for shares priced in too much hope?

Seems to me oil needs to retest some lows, but I’m not sure I’d put any money on that thought.

• The headlines are littered with the word “bubble.” There’s a bubble in stocks and a bubble in bonds. It’s true that stocks are entering the “expensive” range, as the P/E for the S&P 500 is above 20. Half of S&P 500 companies missed revenue expectations in the first quarter. That’s a bad sign, as growing revenue is kind of helpful for companies that want to grow earnings.

We know earnings per share are being helped by share buybacks. Companies are expected to buy back nearly $1 trillion in stock this year, after $4 trillion buybacks over the last four years.

That’s a lot of buying pressure, and it tells us stock prices can continue higher. But at some point (2016?), those buybacks will stop, and the inability to grow revenue will be exposed. This is the biggest threat to stock prices, so keep your eye on it.

• Of course, there is an upside story. Like last year, first quarter earnings growth was terrible. That’s part of the reason the current P/E is so high. But earnings growth could recover over the rest of the year. Fewer Americans are losing their jobs, and more Americans are getting jobs. And there’s even anecdotal evidence that wages are rising.

All that could boost spending, revenue, and earnings. And you know what they say: Never underestimate the American consumer.

• U.S. manufacturing added a net 10,000 jobs in 2014. That may not sound like much, but it’s the first gain in 20 years. The gain is mainly due to the fact the wages around the world are converging. They are coming down in the U.S. and are rising in other parts of the world. So foreign companies are setting up shop here, and U.S. companies are “re-shoring.”

But some companies, like Apple (NASDAQ: AAPL), are doing everything they can to support manufacturing in Asia. Last year, the U.S. “imported” $50 billion in iPhones. This great article shows that essentially all of the economic growth in South Korea and Taiwan is coming from cell phones.

The author also claims that Apple is saving a grand total of $5 per phone by having iPhones made in Asia.

$50 billion in phones may not sound like much for a $14 trillion economy like the U.S. But you could pay 1 million people $50,000 a year with $50 billion…

I wonder if Apple’s CEO is mulling how much he could help the U.S. economy?

That’s all I got today. I’ll talk to you on Wednesday.

Until then,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.