Apple Inc. (NASDAQ:AAPL)’s fiscal first quarter 10-Q filing with the Securities and Exchange Commission shows that the company’s component purchase commitments declined 13% YoY to $16.1 billion. RBC Capital Markets analyst Amit Daryanani said in a research report that he believes the stock to remain range bound until additional buybacks, new products or a product cycle refresh are announced. RBC Capital Markets has an Outperform rating on the stock with a $590 price target.
Correlation between Apple’s sales and purchase commitments
Apple Inc. (NASDAQ:AAPL) outsources almost all of its manufacturing to Asian vendors. The company has various partners to assemble and test its finished products. These partners purchase components and produce iDevices based on information supplied by the iPhone maker. As of December 2013, Apple Inc. (NASDAQ:AAPL) had manufacturing and component purchase commitments of $16.1 billion, down 13% from the same period last year. These commitments demonstrate the Cupertino-based tech giant’s need to co-invest with its supply chain partners.
RBC’s analysis shows that there is a strong correlation between manufacturing commitments and Apple’s units sold on a one-quarter-out basis. The analysts studied data from Q4, 2006 to Q1, 2014, and found that Apple Inc. (NASDAQ:AAPL)’s manufacturing and component purchase commitments have a high correlation with the company’s next quarter outlook.
Apple’s smart move
Apple Inc. (NASDAQ:AAPL) has an asset-light business model where it outsources almost all manufacturing. So, the machinery and equipment investments indicate that the company is co-investing with its supply chain partners to attain capacity and commitments from them. It’s a smart move. Supply chain companies are usually hesitant to commit big ticket capex because they always have the risk of losing clients (like Apple). By co-investing in the machinery and equipment, Apple alleviates their risks and fears.
Apple Inc. (NASDAQ:AAPL) has a cash reserve of $158.8 billion. Of that, only $34.4 billion is in the U.S., and the remaining $124.4 billion is held by its foreign subsidiaries. During the first quarter, the company’s total cash balance increased by 16% or $21.7 billion YoY, thanks to relatively high cash flow from operations, which stood at $22.7 billion.
Apple Inc. (NASDAQ:AAPL) shares jumped 0.49% to $531.56 in pre-market trading Tuesday.