Apple Inc. (NASDAQ:AAPL)’s stock has been trending lower today post news that Foxconn has implemented a hiring freeze at its Chinese manufacturing sites. Analysts at RBC issued a report in which they noted that the news might not be negative.
RBC checks at multiple other supply chain companies suggests that the return rate of employees in China post Chinese New Year (CNY) has been much higher this year vs. historical averages. RBC believes that this may logically be a reason for Foxconn to implement a hiring freeze post Chinese New Year (CNY). Further details from the RBC report below:
Historical Norms: RBC supply chain companies have consistently experienced return rates of 70-80% post CNY, as in certain instances employees who go home for the CNY week don’t return back for work. This year RBC believes the return rates have been closer to 90%, which may minimize the need to hire vs. prior expectations.
Foxconn Apple Inc. (NASDAQ:AAPL) Relationship: RBC estimates that a vast majority of Apple Inc. (AAPL) products (iPhones, iPads, iPad-mini) are manufactured at multiple Foxconn locations and Apple Inc. (NASDAQ:AAPL) accounts for >50% of Foxconn’s revenues. The analysts do understand why the hiring freeze may get construed negatively. However, given the timing of the freeze (post CNY) it may have more to do with higher return rates of employees vs. what was expected by Foxconn and other supply chain companies.
RBC lists potential Catalysts and Valuation for Apple Inc. (AAPL): The list of catalysts they see are 1) iTV launch; 2) China Mobile deal; 3) larger iPhone for emerging markets; 4) iWatch; and 5) favorable capital allocation. In addition, on a valuation basis they believe that Apple Inc. (NASDAQ:AAPL) continues to be undervalued as it is currently trading at ~7x RBC’s FY13 EPS estimate of $43.79 on an ex-cash basis ($145/sh). RBC maintains their current $600 price target pegs Apple Inc. (NASDAQ:AAPL) at 13.7x FY13E EPS or ~10x FY13E EPS on an ex-cash basis.