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Is Apple all grown up? The lifecycle of a growth company

By: Catherine Yoshimoto, Sr. Index Product Manager, Tom Goodwin, Sr. Research Director

Apple is a company that always seems to generate a story – pundits love to talk about it, the public loves to read about it. As comes with the territory of being such a high profile company there are always skeptics ready to say that Apple’s peak has come and gone. As of the 2016 Russell US Indexes reconstitution, Apple experienced a style shift from 100% growth to a blend of both growth and value. So does this indeed indicate the start of a new chapter in Apple’s lifecycle? 

An illustration of a hypothetical company’s lifecycle from startup through maturity can be viewed below. Apple’s primary revenue generator in recent years has been the iPhone. But with the smartphone market becoming increasingly saturated, Apple’s sales and earnings have suffered. Based on news such as this, some imply that the company is at the “maturity” phase of its lifecycle and is approaching a crossroads. Apple could  experience either a “rebirth” or a slow decline as its products face increasing competition.

Business lifecycle

Source: http://www.schencksc.com/education-center/articles/plan-proactively-throughout-the-life-of-your-business, retrieved June 17, 2016. For illustrative purposes only.

While Apple did experience a style shift at this year’s reconstitution, it is still primarily a growth stock – 92% growth versus 8% value. By looking at the Russell Style Index methodology, we can examine the factors that contributed to Apple’s style shift and why Apple is not a value stock within that methodology just yet.

There are three main criteria considered when constructing the Russell Style Indexes -- two “growth” factors and one “value” factor as seen below. If a stock is not classified as purely growth or purely value, then shares of that stock are distributed between the growth and value indexes based on the stock’s style probability.[1]

Constructing the Russell Style Indexes

Source: FTSE Russell. Percentages shown are the weights Russell Indexes apply when determining whether a security falls into the Value or Growth Index.

The first of the two growth factors considered is the medium-term growth forecast (MTG). The MTG is calculated as analysts’ median forecast of a company’s earnings per share (EPS) over the next two years  divided by  current EPS.  As shown below, Apple’s MTG dropped significantly compared to that of the median of stocks in the US large cap Russell 1000 Index.[2]  However, the second growth factor, the historical five-year sales-per-share growth (SPSG) is significantly higher than that of the median. Finally, on the value side of the equation, Apple’s book-to-price ratio (BP) increased in 2016 but remained below that of the median.

Source: FTSE Russell, data as at May 31, 2016.

Source: FTSE Russell, data as at May 31, 2016.

These three factors, when considered together, mean that by using the Russell Style Indexes methodology Apple remains more of a growth than a value stock in 2016 as depicted below. As you can see, style shifts are not new to Apple–after all, Apple was partially value in 2013, and as recently as 2003 was 100% value.

Growth and Value ratio of Apple stock at reconstitution, 1998-2016

Source: FTSE Russell, data as at May 31, 2016.

Despite recent concerns over Apple’s future earnings, we can see that the stock is not fully grown up just yet despite the company’s enormous size. As markets and companies go through cycles, stocks’ style probabilities will change. FTSE Russell provides index tools to track these changes. Regardless of what Apple’s future holds, it’s likely market participants will continue to follow the company as it reinvents itself through its lifecycle as it has done for the past several decades.

Learn more about our analysis of a company based on the risk dimension of equity style, using the Russell Stability Defensive and Dynamic Indexes.  

 
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[1] For additional details on the Russell Style Indexes, refer to the Construction and Methodology.

[2] The process for assigning growth and value weights is applied separately to the stocks in the Russell 1000® and Russell 2000® Indexes and to the smallest 1,000 stocks in the Russell Microcap Index. FTSE Russell research indicates that on average, valuations of small stocks differ from those of large stocks. Treating the Russell 1000, Russell 2000 and smallest Russell Microcap stocks separately prevents the possible distortion to relative valuations that may occur if the Russell 3000E is used as the base index.

 

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