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Six Reasons Tim Cook Is Doing A Great Job As Apple's CEO

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It was about three years ago when Apple’s shares were tanking from $101 to $55 (post-split prices) that there were numerous articles saying the company’s Board should fire Tim Cook, Apple’s CEO. At times articles blaming Cook surface such as the one by Forbes contributor Jay Somaney, which normally don’t take a complete view of Apple or cherry pick its stock performance to try and demonstrate that the shares have not performed well. (Note that I own Apple shares).

A CEO should be judged on many criteria with the company’s stock price being just one of them. Below I’ll go through six areas that I believe demonstrate he is doing a very good job, add two more that are basically average and review the stock’s outperformance since Cook became the CEO.

Executive hires may not be one of Cook’s strengths

From an outsiders perspective I give Cook a mixed grade on people. While I believe he has done some very good things for the bulk of employees (see the next section on culture) the hiring and firing of John Browett was not stellar and it remains to be seen how Angela Ahrendts will do. The firing of Scott Forstall can be viewed two ways. Positively it may help make Apple more collaborative but Apple may have also lost a very strong development resource.

The culture has changed

Tim Cook has changed Apple’s culture. In many ways it is too early to decide if this is for the better or worse but I lean to the better. It seems to be more collaborative and less confrontational, it owns up to its mistakes (Maps is a good example), it has launched a matching gifts program and a Global Volunteer Program and lastly the company, and especially Cook, are speaking about social issues.

Operational execution has been outstanding

Cook is known for his operational skills. You could probably look at almost any metric from gross margins to inventory turns and see that there aren’t many, if any, companies that outperform it. Given that Apple sold over 300 million devices in fiscal 2015 (think about that, it was almost 1 million devices per day every day of the year) managing that large of an operation is very challenging.

Strategy: sticking to its knitting

One aspect of Apple’s strategy that I have always liked is that it doesn’t do large acquisitions. Except for buying Beats for $3 billion (which I’m uncertain how it will turn out) Cook continues to buy smaller tuck-in companies. I have seen too many large acquisitions by technology companies not perform to expectations and given that culture fit is so critical, and that Apple has a pretty unique culture, large acquisitions by Apple run a higher risk of not performing.

Recent financial results have been stellar

In fiscal 2015 Apple generated over $233 billion in revenue (up 116% in four years), with 40% gross margins (essentially flat over four years), had over $53 billion in net income (up 106%), EPS increasing 133%, with over $70 billion in free cash flow (up 110%) before dividends and share buybacks and still has almost $144 billion in net cash.

While I’m sure there are some companies that have had faster growth they will have done it off a much smaller base. Apple has also increased its R&D spending by 232% over the same time period.

Apple doing well against the competition

Apple continues to do well in the smartphone, tablet and PC/Mac market. While it was definitely very late with larger screen iPhones it has been able to increase its share. While iPad sales have been decreasing for the past seven quarters it has been able to maintain its leading market share and it doesn’t appear that any of its competitors have been able to gain traction.

The company has registered eight straight quarters of Mac unit growth and has steadily increased its share. Since the Mac has low market share in absolute terms I believe the ecosystem it has created with the iPhone, to a degree iPads and built from the iPod that Macs will continue to help Apple increase its revenue.

New and future products have potential

There is a lot of angst that there haven’t been any new blockbuster products introduced by Apple since Cook became CEO. Many Apple followers seem to expect the company to develop and release a new ground breaking product every year and for it to be wildly successful from the moment it is launched. While I don’t expect any new Apple product to match the success of the iPhone remember that it took almost four years before the iPhone had sold 100 million units.

I agree that the Watch will need to do better if it is to become an icon type product but it makes sense to see how it does after at least the third generation. It wasn’t until the iPhone 4 started shipping in 2010 that Apple was selling more than 10 million in a quarter.

I believe that Apple Pay could continue to grow and be meaningful to the company. Recently I’ve found Apple Pay to be much easier to use than the new chip credit cards I’ve received. The chip cards either take a long time to complete the transaction, I take the card out too soon or they don’t work at all and I wind up using its stripe. Also by not inputting a PIN with the chip card (and I’m not even sure what my PINs would be for the cards I carry) it lessens the security of them. If Apple can continue to increase the financial institutions it works with this should provide a growing high margin revenue stream. And if it implements a Peer-to-Peer offering this would be a nice add-on to Apple Pay.

There are also plenty of rumors about an Apple car (it does seem that they are exploring this area since they are hiring a number of people in this segment) but I wouldn’t be buying the stock for this reason. In fact I believe it could be a financial drag on the company for upwards of a decade if the company does launch one.

Capital returns to shareholders is a positive

Steve Jobs was notorious for not initiating a dividend or buying back shares. I believe a large reason was Apple’s brush with going out of business combined with the huge increase in Apple’s cash balance starting in 2010 just a year before his death.

Cook has initiated a dividend and share buyback program, which is now at $200 billion. While arguments can be made that the buyback program has not done much for the shares since their PE multiple is below the Street’s I would take the other side of the argument that Apple’s EPS would be lower and while the company would have more cash it is not worth as much as having a higher EPS. I believe Apple needs to return the cash since it is spending more than enough on R&D and I don’t believe large acquisitions would work well for the company,

One concern I do have that a number of people seem to overlook is that Apple has spent so much on buybacks and dividends that it now has a negative US cash balance of about $46 billion when you take into account its $64 billion in debt. Unless Apple decides to bring back overseas cash and pay additional taxes or the US government changes the tax law the company will become limited in how much more debt it can take on to buyback shares.

Stock price over a multi-year timeframe is better than the markets

Will Apple always post better share gains than other companies, No.  As Benjamin Graham said the market is a voting machine in the short term and a weighing machine in the long run. It is also easy to cherry pick certain companies and their stock prices after the fact and pick timeframes to support an argument. If investing was that easy everyone would be a billionaire.

I believe it is better to compare Apple to the S&P 500 and NASDAQ vs. picking a handful of stocks. It is also better to take a multi-year timeframe vs. a one year or less or vs. a certain event.

When you compare Apple’s stock from when Cook was named interim CEO on January 14, 2009, the shares are up 848% compared to the S&P 500 at 148% and the NASDAQ at 243%.

When you start with August 24, 2011, when Cook was named the permanent CEO Apple’s shares are up 122%, the S&P 500 is up 77% and the NASDAQ is up 107%. While Apple may not maintain its outperformance I believe it has a decent shot since it is trading at a PE multiple substantially less than the S&P 500 or NASDAQ.