Is Apple Cheap Enough to Buy Here?
Apple (AAPL) has lost about 33% of its value over the past six months, very publicly. As the stock’s slide has continued month after month, more and more holdouts, including some of our Digest contributors, have been selling. Earlier this month, the stock hit a new 52-week low. So it’s not surprising...
Apple (AAPL) has lost about 33% of its value over the past six months, very publicly.
As the stock’s slide has continued month after month, more and more holdouts, including some of our Digest contributors, have been selling. Earlier this month, the stock hit a new 52-week low.
So it’s not surprising that today, many analysts are looking at AAPL and seeing a whole new reason to buy: value.
Nate’s Notes Editor Nate Pile is one of them, and he is currently recommending his subscribers add to their AAPL positions at lower prices. As he wrote in his March 8 issue, the stock may still go lower. But he thinks it’s an irresistible bargain here anyway. Here’s part of his recommendation:
“Until I’m given evidence that suggests something has changed on a fundamental level rather than just a psychological level, I am sticking to my guns that what is going on with Apple has a whole lot more to do with ‘the script’ that all stocks go through once investors who have been used to only making money off an investment year after year have to instead suddenly start worrying about how much money they might lose!
“As mentioned at least twice in recent months, I remain concerned that now that Apple’s stock has broken into new 52-week low territory, the odds favor a trip back to the high-$300s as well. However, I want to remind you that all it will take is one piece of unexpected good news (and believe me, right now nobody is expecting ANY good news out of the company ever again!) to halt the decline—and, if the news happens to be even a little better than good, it may even trigger a mad stampede back into the stock (and then you will really regret it if you sold your entire position). ...
“To bring in a sports analogy, I kind of see Apple as the NFL team that started the season at 14–0, and now, in game 15, they find themselves down by somewhere between a field goal and two touchdowns (depending how pessimistic you like to be) in the third quarter—and because of it, suddenly everyone is wondering if they’ll ever win another game. Even if Apple ends up heading into the playoffs with a 16–1 record, I know where I’m putting my money for the long haul!
“Provided you are averaging down in a disciplined way (i.e. once a month rather than once a week), I believe the odds are becoming dramatically stacked in your favor when it comes to buying the stock today and then making money in it over the next three years. Consequently, though Apple is already our largest position, I am adding a few more shares this month. AAPL is considered a strong buy under $425 and a buy under $475.”
And Pile isn’t the only analyst advising his subscribers to average down on their AAPL positions here. $100k Portfolio Editor Ian Wyatt recently called AAPL “the world’s greatest value stock,” writing:
“Apple’s stock closed at $432 on March 8. At the current level—nearly 40% below the September 2012 high—Apple’s share price reflects the bear case for Apple.
“Let’s take a look at Apple’s high-level financial performance. Apple operates on a fiscal year ending in September. This is how the company performed last year.
Fiscal 2012: Actual Results:
•Revenues: + 44% to $156 billion
•Earnings: +59% to $44.15 per share
“Let’s also take a look at analyst expectations for the current year.
Fiscal 2013: Wall Street Estimates:
•Revenues: +17% to $183 billion
•Earnings: +1% to $44.59 per share
“In my mind, the expectations for the current year reflect a relatively low bar for Apple. In each of the past three quarters, Apple’s results have fallen short of at least one key performance measure, including revenue, profit or profit margin. As a result, analysts have considerably lowered their expectations. In the last 90 days alone, EPS estimates have been slashed by 10%.
“Apple is cash rich, with $137 billion in cash on the balance sheet. This translates into $146 in cash per share. At the recent share price, 34% of the share value is represented by cash on the balance sheet.
“Shares of Apple today trade at just 9.5 times current year EPS estimates. However, given the considerable cash on the balance sheet, looking at the valuation on an enterprise-value basis makes more sense. The enterprise value backs out the value of cash and debt held by a company in order to understand the true value of earnings compared with the business value.
“Subtracting the $146 in per-share cash from Apple’s value, we arrive at an enterprise value per share of $286. Comparing the EPS estimates to this enterprise value, the stock trades at just 6.4 times earnings.
“So how does this valuation stack up?
“The S&P 500 Index of the biggest companies trades at around 13 times earnings.
“With Apple shares trading at just 6.4 times earnings (net of cash), this stock is priced like an old manufacturing company that’s in a dying business. It is literally valued as though it may be out of business in a few years. On a P/E multiple basis, Apple is the 34th least expensive stock in the S&P 500 index.
“Dominant companies with great products that operate in growing markets typically command a premium valuation. There simply aren’t many market leaders in growth sectors that trade for just 6.4 times earnings.
“Given the current valuation, the market is pricing in a worst-case scenario: no innovative new products, declines in market share and falling profit margins. With the share price already reflecting this incredibly bleak outlook, there would appear to be limited downside to the stock.”
He concludes by noting that while the price trend and investor sentiment could keep AAPL down “for some time,” the price should “eventually” adjust to reflect the business’s financial health and growth prospects. Bottom line? “When a company of this quality and with bright prospects is valued so low, it’s a good time to buy the stock.” And if you already own some, he adds, “now is the right time to double-down on Apple.”
Of course, some investors will have a hard time seeing a $450 stock as a bargain. Richard Moroney, addressed that qualm in the March 18 issue of Dow Theory Forecasts, writing:
“Some investors have trouble seeing Apple (AAPL) as a value stock because of its high per-share price. But the numbers don’t lie. At 10 times projected earnings in fiscal 2013, Apple trades at a 5% discount to the median computer-hardware company in the S&P 1500—after several years of commanding a steep premium because of its superior growth. The stock trades at a 50% discount to its own five-year median trailing P/E ratio, as well as a 35% discount to its historical price/sales ratio and a 50% discount on price/cash flow. For all three of those relative valuation measures, Apple earns a score of at least 89 because it is cheaper than roughly 89% or more of U.S.-traded stocks.
“Apple’s December-quarter revenue growth of 18% lagged expectations, and the company projected 5% to 10% growth in the March quarter—well below the consensus of 16% at the time of the announcement. Since releasing quarterly results, Apple shares have declined 17% and its consensus profit estimates have reset. However, with demand for iPhones and iPads still strong in most markets and scuttlebutt calling for new iPad models in the spring and a new iPhone in the summer, expectations for profit growth of 1% in the year ending September seem conservative, leaving room for positive surprises. Apple is a Focus List Buy and a Long-Term Buy.”
Value- and dividend-oriented advisor Ingrid Hendershot, Editor of Hendershot Investments, thinks AAPL is a good value here too. She wrote in her latest issue, published last week:
“With trailing 12-month free cash flow of $46 billion, Apple’s free cash flow yield is a juicy 11.5%. Apple is attractively valued trading for less than 10 times trailing earnings, or 6 times trailing earnings when the company’s copious cash is excluded. Long-term investors should take a byte out of Apple, a HI-quality company with outstanding growth in sales, earnings and cash flows, trading at an attractive valuation. Buy.”
Of course, there are some advisors who still think AAPL is a little pricey. Jason Kelly is one advisor who think AAPL is almost a good value here. Here’s part of what he told The Kelly Letter subscribers on March 3:
“To the surprise of many readers, we did not miss Apple (AAPL). In Note 7 sent Jan 27, we looked back at our long wait for the stock to drop below $500 amid the chorus of bullish calls as it flirted with $700. Our approach assumes that people are deluded into thinking the current Apple is the same as the visionary firm run by Steve Jobs until the end of summer 2011. We can’t expect any miraculous technology breakthroughs, even though we hope they happen, and so are left analyzing Apple’s financial fundamentals. They point us to a $400 price target.
“After setting it and adding the stock to our primary Watch List, we saw AAPL rise to $485 on Feb 11. Notes accusing our $400 target of being too aggressive on the downside poured in. Since then, however, the stock has settled back until making a new 52-week low on Friday at $430 after a 2.5% drop that day. The latest narrative fallacy explaining the price weakness is that Apple made a mistake in starting its iPad at a large screen form factor instead of the increasingly popular small screen form factor used on the iPad Mini and rival devices. Had Apple started with the smaller form factor, goes the argument, it would have locked up the growing market once and for all.
“That’s what they’re saying this week. A week before it was slowing iPhone sales. The week before that it was delays with Apple TV. The week before that it was shortcomings in iOS apps versus Android apps. This is all just detail best grouped under the heading, ‘Price Not Yet Supported By Fundamentals.’ With stocks, every data point should be reduced to its impact on revenue and earnings. Clarity ensues. There’s nothing more to the Apple story than waiting for its stock price to become cheap enough compared to a composite of its historical earnings and its projected earnings to create a risk/reward ratio favorable enough to justify buying it. That’s what we’re doing, eyes on $400.”
Personally, I’ve never been much of a bargain hunter (I don’t even like shopping from sale racks) and I don’t have any proprietary valuation tools. So I won’t weigh in with my personal opinion here. But if you do decide to average down on AAPL here (or get back in if you sold higher), you’re certainly in good company.
Wishing you success in your investing and beyond,
Editor of Investment of the Week