Apple tends to get a Buy rating or the equivalent from analysts, but one firm that had bucked the trend was Jefferson Research. The firm had a Hold rating on Apple for the fourth and first quarters but has now upgraded the company to Buy.

Apple Inc. (AAPL) Upgraded By Jefferson Research

Apple (AAPL) gets upgrades in two categories

Perhaps one of the most interesting things about Jefferson’s research reports is the division of a company’s metrics into five specific categories. Those categories are earnings quality; cash flow quality; operating efficiency; balance sheet; and valuation.

Apple Inc. (NASDAQ:AAPL) received the biggest upgrade in its balance sheet, as the firm upgraded its rating on that metric from Weak to Strong. The company also received an upgrade in earnings quality from Strong to Strongest.

Apple’s (AAPL) earnings quality upgraded

Jefferson analysts evaluate the quality of a company’s earnings be adjusting for items that increase the reported earnings number, the amount of cash flow that’s supporting the earnings “and other anomalies,” resulting in an “adjusted earnings number that more accurately reflects ongoing business fundamentals.” The firm’s analysts then compare their adjusted number to the reported number.

In the area of earnings quality, Apple Inc. (NASDAQ:AAPL)’s reported net income fell from $18.024 billion to $13.569 billion due to seasonality. Jefferson analysts say the quality of the net income also fell. Apple also saw a decline in operating cash flow and operating cash flow to earnings.

Here’s a look at how their numbers shake up (All charts / graphs in this article are courtesy Jefferson Research):

Apple’s (AAPL) cash flow remains at Strongest

In determining the quality of Apple Inc. (NASDAQ:AAPL)’s cash flow, the Jefferson team excludes items that aren’t part of the company’s recurring cash flow or that come through “actual operations.”

The analysts state in their report that the quality of Apple Inc. (NASDAQ:AAPL)’s debt coverage improved quarter over quarter, although the decline in the quality of the company’s operating cash flow offset that increase. Overall then, the firm states that Apple’s cash flow quality declined slightly quarter over quarter, although not enough to earn a downgrade in this metric.

Apple (AAPL) retains Strong rating in operating efficiency

Jefferson analysts used several factors like margins, return on invest capital, expenses, and equity and asset turnover to determine a company’s operating efficiency. They state that Apple Inc. (NASDAQ:AAPL) saw improvements in equity turnover, gross margin, and return on invested capital quarter over quarter but weakened return on incremental investment capital, EBIT and net margins, and selling, general, and administrative costs.

Apple (AAPL) receives a boost in its balance sheet

The firm upgraded its rating on Apple’s balance sheet from Weak to Strong based on improvements in accounts receivable days outstanding, cash position, and current and quick ratio improvements.

Apple’s (AAPL) valuation remains at Least Risk

And finally, Jefferson analysts see Apple Inc. (NASDAQ:AAPL)’s valuation as favorable, rating it at Least Risk. They believe there’s a low risk for downward price movement because, as others have noted, the company’s multiple is lower than that of its sector average.

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