Although analysts from most firms seem to be quite bullish on Apple heading into next year, at least one firm has downgraded the company’s stock. Jefferson Research cites Apple’s weakening balance sheet as the main reason for their downgrade from Buy to Hold.

Apple Inc. (AAPL) Downgraded By Jefferson Research
Source: Pixabay

Earnings quality also declines

In a report dated Dec. 26, Jefferson said the quality of Apple’s earnings also declined in the fourth quarter. They now rate the company’s earnings quality as Strong, down from the previous rating of Strongest, and its balance sheet as Weakest, a significant downgrade from the third quarter’s rating of Strong.

The Jefferson team sees Apple’s weakening liquidity as a big problem for the company, pointing out the increase in DSOs from 34 up to 53 days. The increase means the company is taking longer to receive payments from customers, which results in decreased liquidity. In addition, Apple reported an in inventory days from five to seven days. The increase means Apple is holding its inventory for a longer period of time before selling it to customers, which requires greater working capital.

They cut the company’s earnings quality from Strongest to Strong in the fourth quarter. They noted that the quality of Apple’s reported net income declined in spite of the increase, as net income rose from $7.748 billion to $8.467 billion. They point out though that the company’s operating cash flow increased from $10.255 billion to $13.25 billion. They also saw an improvement in Apple’s operating cash flow to earnings.

Apple remains strong in cash flow quality, valuation

Apple continues to receive the Strongest rating from Jefferson analysts for the quality of its cash flow. They noted improvements in the company’s debt coverage quality. The quality of the company’s annual operating cash flow declined, however, offsetting the improvement in debt coverage quality.

Apple also continues to receive a rating of Least Risk in valuation. Jefferson saw an improvement in price to earnings growth, which was offset by the decline in price to sales ratio compared to the rest of the sector.

Apple improves in operating efficiency

The firm saw a significant improvement in operating efficiency, as the Jefferson team raised their rating in this area from Weak to Strong. They cited improvements in selling, general and administrative costs and ROIC.