Valuing Apple is probably one of the nation’s favorite pastimes, save buying Apple gear and talking and reading about Apple’s next generation products and new innovations. It’s certainly an interesting time to engage in the endeavor, a day after the stock jumped $15, which for AAPL is just a 2.6% move.
Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.
Buy Apple (Nasdaq: AAPL)
The stock today, at $584 per share, is 9% short of its high for the last 52-weeks, and so may entice some investors who might be following the stock for a best entry point. That said, it’s hard to call it under-appreciated, after having gained 74% in capital appreciation from its low for the year, which was marked about a full year ago.
Chart from Yahoo Finance
With a market capitalization of $546.08 billion, Apple is the largest company in the world by market cap, followed by Exxon Mobil (NYSE: XOM) at $400.14 billion, Microsoft (Nasdaq: MSFT) at $256.98 billion and Wal-Mart (NYSE: WMT) at $235.9 billion. Thus, the most relevant question to ask about Apple is, can it continue to grow even larger. Math dictates that it gets harder to grow off larger numbers. The company’s growth prospects would also seem limited, with Apple iPhone already well penetrated into the mobile phone market, having severely disrupted competitors Research in Motion (Nasdaq: RIMM), Nokia (NYSE: NOK), Palm – owned by Hewlett-Packard (NYSE: HPQ), Motorola Mobility, owned now by Google (Nasdaq: GOOG), Samsung and others. The competition has copied Apple’s style now, with full glass facades and “app” offerings now commonplace. So, perhaps mobile market share will get harder to come by as we move forward.
Giving credit to Amazon.com (Nasdaq: AMZN) for its eReader break-through, Apple’s pioneering effort in tablet computing, with the iPad establishing an entirely new category in electronics, has drawn competition from rivals in mobile and computing, as well as from Microsoft (Nasdaq: MSFT), Google (Nasdaq: GOOG) and others. Within computers, Apple’s Mac line has had its place rivaling PCs made by Dell (Nasdaq: DELL) and others for years now. So how will Apple keep growing? Because it will have to in order to justify valuation in years to come.
I am certain that this question is the reason for Apple’s very low P/E-to-growth ratio of 0.6, which is based on its P/E ratio of 12.5X and 5-year growth forecast of 21.8X, based on Yahoo Finance data. If the market were more confident in Apple’s growth outlook, this ratio would be upward of 1.0. The P/E ratio calculated here is based on the $46.84 FY 2012 (Sept.) analysts’ consensus EPS estimate. It’s therefore even more conservative a valuation, as September is just a quarter away. If we base the PEG on the FY 13 consensus EPS estimate of $54.23, we get a value of 0.5. Thus, if you believe AAPL can actually manage 21.8% EPS growth over the next five years, as analysts seem to, then AAPL is a screaming buy.
It’s also likely that the stock’s price limits retail investor participation and holds down the valuation and market capitalization. Corporate managers like Berkshire Hathaway’s (NYSE: BRK-B) Warren Buffet believe this also manages stock volatility by keeping gamblers out and sincere equity investors in. If Apple wanted to lift its valuation and stock price it might split the shares 5-for-1 or more.
AAPL’s current P/E ratio based on its trailing twelve months EPS is 14.2X. That compares well to AAPL’s historical P/E ratio of the last five years. The average high P/E ratio of the last five years has been 26.6X, while the average low P/E ratio has been 13.6X. Based on that historical data, now would seem as good a time as any to take a position in AAPL shares. Still, I think you have to believe in its growth prospects to do so. I do, but I’ll explain why in a future article, so follow my column at the Wall Street Greek blog to keep up.
Analysts are overwhelmingly recommending AAPL shares for purchase today, but as we know, analysts often fall into a trap with popular stocks and make the safe call. However, I happen to agree with them this time, because I believe in AAPL’s growth prospects. Different data providers show slight variations in their details of the information, but there is a heavy overweighting of analysts either rating the stock buy or strong buy. As for target pricing, Yahoo Finance shows the analysts’ mean target price for AAPL at approximately $715, while MarketWatch.com has it at $743. The mean of those two resources is $729, giving AAPL upside potential of 25% over the coming year. In conclusion, I would buy AAPL today based on its tame valuation and my view that its growth expectations will be supported. Stay tuned, as I cover more about why I think so in my next two AAPL reports.
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