Apple Earnings: What's Next?

| About: Apple Inc. (AAPL)

You think the market is rational? Google (NASDAQ:GOOG) had 5% profit growth and the stock went up 5%. Apple (NASDAQ:AAPL) announced 13.5% profit growth and the stock sold off, after hours, 4%. Google sells for 31 times trailing earnings and has declining average click prices. Apple sells for less than 12 times earnings and average selling prices are stable or increasing across their product lines.

Here is Apple’s earnings announcement In short – and I took the liberty of adjusting results to reflect Q4 in 2012 having 13 weeks and Q4 in 2011 having fourteen weeks:

Revenues were $54.5 billion, up 25% over calendar Q4 2012

  • Profits were $13.81 billion, up 13.5% over calendar Q4 2012
  • iPhone sales were 47.8 million, up 39%
  • iPad sales were 22.9 million, up 64%
  • Mac sales were 4.1 million, down 15%
  • Cash on the balance sheet was $137 billion or 28% of the market cap at the close of trading.

And with these numbers, by far better than any company in tech land or the S&P 500, the stock sold off in after hours trading.

The company, regardless of the seemingly endless and unfounded concerns by analysts, traders and erstwhile Apple experts, is clicking on all cylinders and these are astounding results in a world economy barely growing. Apple is now a Warren Buffett company, an overwhelming brand company with a strong management group and product lineup selling at a deep discount to the market and loaded with cash. If he could afford to, I bet Buffet would buy Apple. Apple is growing more than 20% a year - if it is a bad year it will be just 20%, it could be more than 30%, the range from analysts is quite wide. And it makes money on its hardware products, something not true for most of its competitors.

That is the company. What about the stock?

One year ago the stock closed at $423.65; the stock closed at $509.45 today, up 20% but well off i’s high north of $700. The S&P 500 is up 13% over the same time period. Not fair - Apple’s earnings will come in up more than 35%, the S&P 500 earnings were up 2%. From a fundamental valuation point of view, the stock is selling at a discount of 12% to the S&P based on trailing earnings, it is selling at a discount of more than double that based on consensus estimates for AAPL and the S&P 500. Google sells for 31 times trailing earnings, Apple for less than 12. And Apple has far stronger profit growth. If you go a bit deeper and look at enterprise valuations – taking the value of their cash into account - the stock is selling at a more than 40% forward discount to the S&P 500. Not to mention it is growing and the rest of the S&P is barely seeing any revenue growth.

And the market does not care - at least not right now. The traders have taken hold, people are still taking some profits, giving investors the opportunity of a lifetime to buy the best company on the planet at a 25%-40% discount to the market. Yes, investors. What about traders?

Let the stock stabilize through the end of the week. Then if you agree with me buy it and immediately sell calls - the sale of weekly or monthly calls will produce a 20% or more return if managed properly even if the stock does not move. Or look to sell a February put about four strikes below wherever it settles on Friday - if you are willing to own the stock at the strike price of the put.

The stock is on sale. You might was well generate a great deal of cash and income and enjoy the sale the while it lasts.