Apple: A Sector Unto Itself, Says JP Morgan

JP Morgan hardware analyst Mark Moskowitz this morning teams up with the folks at the firm’s portfolio strategy confab to discuss Apple (AAPL) as a “cyclical” sector unto itself. Not a cyclical company, but a sector.
Moskowitz’s colleague, portfolio strategist Thomas Lee, offers up some observations on how massive Apple is relative to the Standard & Poor’s 500 Index, how under-owned it is by funds, and how it is relatively undervalued:

AAPL carries greater weight than most industries and several sectors. At 3.7% of the S&P 500, AAPL carries a larger weight in the index than Basic Materials, Utilities, and Telecom Services (see Figure 7) and would be the 6th largest industry (GICS Level 3). YTD, AAPL has accounted for 11 of the 104-point move in the S&P 500. In other words, as a stock, AAPL is more important than most industries and many sectors. The stock remains underowned institutionally. Of the 282 mutual funds indexed to the Russell 1000, a surprising 40% do not have AAPL as a top 10 holding � this despite the fact that AAPL is the largest stock in the Russell 1000. AAPL at current valuation is undervalued on absolute P/E (12.0x vs. 12.7x S&P 500), its relative P/E (94% vs. historical avg of 164%), or PEG ratio. By our ests, moving to historical avg adds 24- 38 points to the S&P 500 � in short, showing AAPL is important to our Cyclical call.

The report is in part prompted, no doubt, by the observations this week of how influential Apple is on the S&P, made by S&P’s own index veteran Howard Silverblatt, and written up on Tuesday by my colleague Brendan Conway.
Moskowitz and Lee are hosting a conference call this morning at 10 am, Eastern time.
In a companion note, Moskowitz this morning writes that he sees “substantial appreciation potenti! al from current levels” for Apple shares given that the company “continues to disrupt the tech playing field.”
With its optimized smartphone, tablet, and notebook PC form factors, complemented by its iTunes/App Store ecosystem, the company single-handily has disrupted the technology playing field. The supply chain has been impacted, and there also has been a splintering of the Wintel and Android-based camps. As a result, we expect many industry participants to be left scrambling to restore relevance in the next few years.
Moskowitz notes the company has “low penetration rates,” including just 19% share of smartphones, 5% share of PCs/
Apple shares this morning are up $3.57, or 0.7%, at $519.96.
Moskowitz and Lee offer a few tables of com parables to size how Apple ranks relative to cyclical stocks, industries, and sectors:

Facebook Readies IPO Filing

Facebook is close to picking Morgan Stanley as the lead underwriter for its initial public offering, a significant step toward what is likely to be one of the biggest-ever U.S. public debuts. Don Clark has details on The News Hub. Photo: Reuters

Facebook Inc. could file papers for its initial public offering as early as this coming week, people familiar with the matter said, as anticipation mounts for what is likely to be one of the biggest debuts for a U.S. company.
The deal, seen as defining moment for the latest Web investing boom, could raise as much as $10 billion and value the social network between $75 billion and $100 billion, said people familiar with the matter. A valuation of $75 billion would be below earlier expectations.
The website, which in less than eight years has attracted more than 800 million members, has changed the way people across the globe communicate, from organizing political protests to sharing baby pictures.
The ! Internet giant is close to picking Morgan Stanley to lead the deal, these people said. Wall Street banks, many of them struggling amid a crimp in trading profits, have been jostling for a leading role in the deal, which could yield them tens of millions of dollars in banker fees, potential new business and bragging rights.
A nod for Morgan Stanley would mark a disappointment for rival Goldman Sachs Group Inc., which a year ago was viewed as having an edge to lead the deal. One person familiar with the matter said that while Morgan Stanley would likely land the coveted "lead-left" spot on an IPO financial filing, Goldman would also likely play a significant role.
Spokespeople for Facebook, Morgan Stanley and Goldman Sachs declined to comment.

Facebook could file IPO paperwork as early as Wednesday of next week, and Morgan Stanley is close to winning the "lead left" position in the IPO. Facebook has been valued between $75 and $100 Billion dollars.

Facebook could file documents with the Securities and Exchange Commission as early as this coming Wednesday, said one person familiar with the matter. But that timing is just one scenario Facebook executives are considering, the person said. Executives are also considering filing a few weeks later, the person said.

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People familiar with the matter have sai! d the co mpany is targeting an IPO sometime between April and June.
A $10 billion Facebook offering would rank fourth among IPOs for U.S. companies, behind Visa Inc., General Motors Co. and AT&T Wireless, according to Dealogic. It would rank Facebook as the biggest U.S. Internet offering ever, replacing Google Inc., which raised $1.9 billion in 2004 at a $23 billion valuation.
At a $100 billion valuation, Facebook would be worth about the same as McDonald's Corp. and nearly half of Google.
Facebook's revenue is driven by its advertising business, as big brands rush to the site to interact with consumers through display ads and fan pages. Facebook has been able to increase its world-wide advertising revenue from $738 million in 2009 to $3.8 billion in 2011, according to estimates from research firm eMarketer. It isn't known if Facebook is profitable.
Facebook's final valuation will be determined by a variety of factors, people familiar with the matter said, such as investor demand for social media, the IPO market and the health of the European economy.

The IPO will mint a new generation of Silicon Valley millionaires on the level not seen since Google's offering. Some 3,000 people work at Facebook.
An IPO will also test the ability of Chief Executive Mark Zuckerberg, age 27, to manage a global company whose financial performance will be scrutinized every three months by investors. Mr. Zuckerberg started the company in 2004 out of his Harvard University dorm room. Overall, about 500 million users now log into the site daily, according to Facebook.
Mr. Zuckerberg had been reluctant to push forwar! d with a n IPO. People familiar with his thinking said he has been fearful of the damage an IPO could do to the company's culture. He wants employees focused on making great products, not the stock price, they said.
But outside forces are partly pushing his hand. Facebook executives began to realize in 2010 that Facebook would have more than 500 shareholders by the end of 2011, which would trigger a regulatory requirement that Facebook start publicly reporting financial information.
Mr. Zuckerberg decided it made more sense for Facebook to go public and reap some financial benefit from an IPO, rather than stay private but have to release its financial information, said people familiar with his thinking.
Leading the Facebook sale would be a huge win for Morgan Stanley, which last year cemented its position as the top Internet stock underwriter by leading the IPOs of LinkedIn Corp., Groupon Inc., and Zynga Inc. The bank's global tech banking team, led by Michael Grimes and Paul Chamberlain, is also based in Menlo Park.
Facebook would cap a recent wave of Web IPOs, some of which have struggled amid growing investor scrutiny of the new Internet companies. But investors and analysts said now could be a good time for a Facebook offering.

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This year, the overall market has risen, and on Friday other Internet stocks rallied on news that Facebook would soon file for a deal. "The excitement around Facebook is still enormous," said Max Wolff, an analyst at GreenCrest Capital, which researches companies going public.
The recent IPO climate "hasn't been particularly strong," said Peter Falvey, co-head of the technology banking group at Morgan Keegan & Co. But Mr. Falvey added that with "the recent stock market strength and maybe some green shoots in the economy, there could be a fortuitous window for Facebook."
Write to Shayndi Raice at shayndi.raice@wsj.com and Randall Smith at

Polypore's 2011 Points to Promise

Polypore International (NYSE: PPO  ) , a Charlotte, N.C.-based filter technology specialist, makes parts for use in batteries that help run things such as tablets, smartphones, and electric-drive vehicles (EDVs). To the savvy investor, 2011 may very well have become a turning point for growth in this company. During the first half of the year, investors seemed to be on board, but that optimism later turned sour. Here's why.
Early 2011
Polypore started things out strong with back-to-back earnings announcements that smashed expectations. Though management never gave specific outlooks, it repeatedly cited increased demand for the company's products as reason to view the future optimistically.
During the first half of the year, that was music to investors' ears.

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Late 2011
But then in August, things started to head south. Even though the company recorded an eye-popping 85% increase year over year, investors didn't like what they heard moving forward.
To Fool contributor Neha Chamaria, that reaction seemed silly. The main reason the company told investors to temper their short-term outlook was a good one: IT would be spending money to expand its capacity to meet customer demand.
With battery companies such as Exide Technologies (Nasdaq: XIDE  ) and EnerSys (NYSE: ENS  ) demanding more of what Polypore has to offer, the company has no choice but to spend the money to expand if it wants to meet demand. And if EDVs ever take off from the likes of Tesla (Nasdaq: TSLA  ) or even Ford (NYSE: F&nb sp; ) , the future could prove even more lucrative for Polypore and make this buildout look even more prescient.
So even though the company finished 2011 on a down note, I believe Polypore could have a bright future.

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2012 and beyond
Though I believe the future is bright for Polypore, it's not The Motley Fool's Top Stock for 2012. Instead, our analysts have found a company that has all the greatness of Costco baked into its DNA but operates in the quickly growing economies of Central and South America. Get your copy of our special free report detailing the company today, absolutely free!