Apr 2 2020 - What Apple's Production Recovery Tells Us About Coronavirus Disruption

As we know we've a significant recession on our hands as a result of the coronavirus. Perhaps a 20% decline in GDP over two quarters.

The important question is how long this lasts. An interruption, a slump then recovery, is hugely less damaging than a permanent shrinkage in the economy.

Apple gives us an insight, given its global reach and manufacturing base in China, into what's likely to happen - deep but short. Apple is thus a modest buy.

The coronavirus point

That we've a recession is obvious. Moody's Analytics, just as an example, is predicting an 18% drop on an annualized basis, for GDP in the second quarter. That's horrible, we've not seen that in many a decade. However, what's important to us as investors (a well as producers and consumers in the economy more generally) is how long this is going to last for. Moody's, again, is predicting a couple of percentage points decline in GDP for the whole year. That, obviously enough, means they're predicting a significant recovery in Q3 and 4. Not quite back to our starting point but close to it.

(Apple stock price from Seeking Alpha)

Sure, we'll not enjoy neither the trip nor the return to being poorer at the end of the year than we were at the beginning. But a couple of percentage points of GDP is merely uncomfortable, it's not a disaster.

The thought that this is what is going to happen being what has led the markets to rally just recently. I think the market is still overestimating the recovery period and thus Apple, as with other major stocks, is a modest buy.

We though would like more evidence on this.

China

China is where this all started and they're a couple of months ahead of everywhere else as they have since that beginning. We have some economic statistics coming out of China and they are from the period during and possibly after COVID-19. I had a more detailed look here.

The essential message here is that China is getting back to normal. Yes, production and output are still below the starting point. But we have passed the nadir, we're through the depth of the valley and coming up the other side already. Don't forget, the economic impact only started in January. Data being currently released was collected towards the end of March. We really are talking about a couple of month thing.

Yes, yes, yes, full recovery will take longer but China has already turned that all important corner. It seems reasonable enough to think that much the same will happen to us. Apart from anything else this is the only relevant evidence we've got so we really should pay attention to it.

Apple (NYSE:AAPL) as a coronavirus test case

We might well think - largely because there's truth to the thought - that what the Chinese government tells us isn't something we want to believe without checking. The private sector version of the Chinese manufacturing survey mentioned about tells us much the same thing. The sector is back to expansion albeit from that new low base caused by the pandemic. Perhaps not quite as exuberantly as the official figures have it but back to expansion all the same.

However, we've another entirely private sector measure we can use. Apple has near all of its manufacturing in China. The country is also a major market for its products. Finally, the company cannot be browbeaten by anyone in China into stating untruths. It's too big for any of that sort of pressure to work. So, we can use what we can glean about Apple's operations to see what has been and is happening.

Logically, this will also tell us something useful about the company's own performance which we can use to make an investment decision about the stock itself, ahead of Q2 results on 5 May - that's the current planned date at least. We know that the company says it will fall short this quarter but that's not the point, as with our GDP estimations above. It's how long before a return to normality that matters. For we have absolutely no fear at all about the company surviving this mess. It's only when will growth and profits come back as usual that we're thinking about.

We know this quarter won't be pretty

Apple themselves have said they'll not hit targets:

The first is that worldwide iPhone supply will be temporarily constrained. While our iPhone manufacturing partner sites are located outside the Hubei province - and while all of these facilities have reopened - they are ramping up more slowly than we had anticipated.

Since that statement we've more information about what is happening in those factories. So, perhaps we'll be pleasantly surprised. There is also this:

The second is that demand for our products within China has been affected. All of our stores in China and many of our partner stores have been closed.

We've also more information about that. That's likely to be less of a pleasant surprise.

In China

We've not had official statements from Apple on this as yet but there has been some press reporting. That plus the Chinese government stating that everything is nearly back to normal but then they would say that, wouldn't they?

We've known for a couple of weeks now that the stores in China are all open again:

Apple has reopened all 42 of its branded retail stores in China as of today, a company spokesperson confirmed to Bloomberg and Reuters. The stores had all shuttered in early February as China restricted travel in an attempt to slow the coronavirus outbreak, but they have been gradually reopening over the past few weeks.

That's as of 13 March.

And we're hearing that the factories are getting back up to speed. If not entirely there at reporting date, expected to be by the end of March.

Officials boast that things are almost normal again. Fully 98% of all listed companies have resumed work, says the securities regulator. Around the country 89% of big investment projects, from airport expansions to the laying of gas pipelines, are also under way, according to a planning commission. "Roaring Chinese factories in full swing", Xinhua, a state news agency, proclaimed on March 21st.

Well, yes, that's not even official statistics, that's the government PR department. I used to work in PR and no, we don't believe them. We do however believe these people:

Nevertheless, on the supply side, the overall picture is encouraging. Large companies report that they are fully operational. Foxconn, which makes most of Apple's iPhones in China, has said that it will resume normal production by the end of March.

One the other side of this we've got to also note that Apple's European stores have been closed recently and it's not known when they're going to reopen.

The effects on Apple's quarter

This reporting quarter is obviously going to be terrible by Apple's lofty standards. Production was at least curtailed for 6 weeks or so, fully stopped for at least some portion of that time. Perhaps their largest single market, China, was closed to retail for again some portion of that time. Europe is closed now, the US is at least limited and so on.

So, we're not going to see good figures. But the stock price already reflects that as above.

What can Apple tell us about the economy?

The much more important information we can gain here is what Apple's travails can tell us about the economy more generally. Yes, we're in a pandemic. Yes, we've got a recession, a harsh one. But how long is it going to last?

The answer, it appears, being not all that long. Not all that long as an actual crisis that is. Production is back up and running, in full 6 or 7 weeks after the close down. Retail stores are reopened ditto. Yes, lockdowns are spiraling around the world as the virus spreads but there's little we know about anything that says the Chinese experience won't be that of all. Harsh, deep, recession and a quick restart.

My view.

We've not got any worries about Apple's ability to survive current times, not with 0 billion of cash and cash equivalents in securities we've not. We know that the slowdown in sales will be significant this quarter, that stock availability might be limited in the near future as a result of production shut downs.

There's even a problem that is happening to a colleague of mine who has stock at several airports that he can't move (No, not Apple stock, nor even stock as in shares, he's an arms dealer for Uncle Sam). Most airfreight moves in the holds of passenger jets, which aren't flying. Therefore there will be limited ability to move stock out of China - although Apple is large enough to overcome that with freight only flights.

The question over and above that becomes how long this is all going to last. And the Apple experience tells us not long.

The investor view

We're not going to buy Apple purely for the dividend:

(Apple dividend yield from Zach's)

1.2% is nice to have and all but that's not the point of owning the stock. Our question is, instead, is the fall in the stock price overdone given the transience of the coronavirus effect? I argue yes, it is. Partly on the grounds that Apple is back up and running. But also, and more importantly, because of what Apple being back up and running tells us about the more general effect upon the economy.

Yes, we're in a horrible and nasty recession, 10 and even the wilder claims of 20% off GDP this quarter are believable. But it's all going to be short. We'll not be back to where we were in 6 weeks or 2 months but we will be back up and operating again.

Thus Apple is a buy on the basis that Apple has recovered its production faster than others as a result of it being in China. And Apple is a buy because it's a good solid stock and the markets are, in my opinion, oversold on the basis of uncertainty about the length of the recession.

I am therefore modestly bullish about Apple in this short to medium term, as I am about all major stocks at present.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.