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Introduction

The major strengths of Apple Inc. (AAPL) lie in its high-end products, the incredible loyalty of its customers, and its fast-paced growth. Apple is considered to be the most admired company in the world. Customers are willing to wait in the freezing cold weather just to get their hands on the latest models of iPhone, iPad and Macs.

Vertical expansion, strategic alliances, innovation and globalization are the key features of Apple's financial and accounting success. But the stock performance of Apple is still questionable. After showing the highest price for the past 5 years of $702.1 on September 19, it has been showing a declining trend in its stock price.

In an earlier article, we took a look at how Apple got to be Apple and what way investors could speculate a bit on the company's growth prospects going forward. These questions were considered by using the concept of economic moats popularized by legendary investor Warren Buffett. Time has passed and brought changes to the tech industry. In this article, let's explore whether Apple is not outperforming the market as expected by the analysts and its past performance. We will compare the current financial and stock performance of Apple with three of its direct competitors - Hewlett-Packard Company (HPQ), BlackBerry (BBRY), and Google (GOOG). Well, can anyone breach Apple's moat for now?

Tracking Financials

Apple is ranked 7th by computer hardware sales in the US although its share price is the largest in the industry. Compared to its direct competitors, Apple is selling at a price to sales, which is lower than Google but higher than both Hewlett-Packard and BlackBerry. As of the time of this writing, the financial highlights of Apple and three competitors are presented below.

Indicators

AAPL

GOOG

HPQ

BBRY

Qtrly Rev Growth

0.18

0.36

-0.06

-0.47

Revenue ttm

164.69B

50.18B

118.68B

12.59B

Gross Margin ttm

0.42

0.59

0.23

0.31

EBITDA ttm

59.26B

16.28B

14.30B

1.55B

Operating Margin ttm

0.33

0.27

0.08

-0.03

Net Income ttm

41.75B

10.79B

-12.89B

-847.00M

EPS ttm

44.11

32.21

-6.55

-1.67

P/E ttm

10.08

24.83

N/A

N/A

PEG (5 yr expected):

0.52

1.28

-6.99

N/A

P/S ttm

2.53

5.25

0.33

0.54

Beta

0.75

1.16

1.13

N/A

Source: Yahoo Finance and Reuters

Apple and Google have shown positive revenue growth whereas both HPQ and BBRY have experienced negative growth in the previous quarter. The highest revenue is generated by Apple, which is followed by Hewlett-Packard. A beta of 0.75 is also lower than the beta of Google, which is 1.16, and a beta of 1.13 for Hewlett-Packard.

Apple has shown the highest EPS, operating margin, gross margin, EBITDA, and net income as compared to its three competitors. The financial performance of Apple is really commendable and remarkable. Despite the strong financial performance of Apple, it still could not beat Google on the P/E ratio, price to sales and P/E growth, which is not a healthy sign for Apple. A low beta coupled with low price ratios make Apple a low risk and low return company as long as the market performance of the company is concerned.

Investors who are interested in the long-term relationship with the company seek profitability ratios and want to earn a higher return on their investment. Below is the table, which shows the major profitability ratios of Apple and three competitors.

AAPL

BBRY

HPQ

GOOG

ROA

24.94%

-6.35%

-11.05%

12.97%

ROE

38.41%

-8.67%

-41.53%

16.61%

ROI

32.96%

-8.45%

-17.92%

15.08%

Gross Margin

41.91%

30.68%

23.01%

58.88%

Oper. Margin

33.46%

-10.85%

-9.56%

25.43%

Profit Margin

25.35%

-6.73%

-10.86%

21.50%

Source: Financial Visualizations

It is very interesting that except for Gross Margin, Apple has shown a very high profitability ratio which none of its competitors could match. Apple and Google are the only profitable companies while HPQ and BBRY have shown negative performances.

The most important profitability ratio for investors is the return on their investment, which is significantly high for Apple. It has shown a 32.96% return on investment and 38.41% return on assets as compared to the 15% return on investment and 16.6% return on assets observed by Google last year. A profit margin of 25.35% is also the highest for Apple followed by a 21.5% profit margin for Google.

Five-year profitability analysis of all companies is presented below. The historical trend of the past five years has also gone in favor of Apple as it is the only company, which has shown a constant growth in its profit margin. When all the other companies showed a decline in profit margins in 2012, only Apple showed a significant increase in the profit margin and net profit margin (although not shown here). As the dividend has to be paid from the net income other than any investment to be made through net income, a higher profitability of Apple makes it the most desirable investment, which shows a constant growth and low risk for the investors, especially those who seek a long-term commitment.

(click to enlarge)

Source: Google Finance

A surprising result is observed when we look at the price multiples of Apple with its competitors. Despite Apple's being the most profitable company, investors still are ready to pay Google the most. Price to sales, price earnings growth, price to free cash flow, and price to earnings are the highest for Google. Only the price to cash of Apple is higher than its competitors, so the stock of Apple is significantly undervalued than that of Google. Dividend yield of the previous year is only available on Apple, which is 2.45% higher than the industry average of 1.65%.

Indicators

AAPL

BBRY

HPQ

GOOG

Forward P/E

8.76

-

5.55

14.98

PEG

0.53

-

-

1.72

P/S

2.53

0.55

0.33

5.25

P/B

3.28

0.73

1.69

3.68

P/C

10.48

2.54

3.07

5.48

P/FCF

9.53

8.42

5.18

19.76

Quick Ratio

1.51

2.08

0.97

4.18

Current Ratio

1.54

2.23

1.12

4.22

Dividend yield

2.45%

-

-

-

Source: Financial Visualizations

In addition to the quantitative and financial analysis conducted above, Apple and Google have several qualitative arguments in their favor as compared to Hewlett-Packard and BlackBerry. Both of these companies, Apple and Google, have shown a fast paced growth, rapid expansion, and have initiated a variety of restructuring efforts over the last few years. Both Google and Apple have been showing a tremendous effort promoting the business as environmental friendly, in part because Apple has been criticized because of its lack of involvement in social issues. Both the companies have earned a passionate customer loyalty, brand image, and a top notch reputation among its customers and the users of these types of products.

What is a Fair Apple Stock Price?

There are many ways to estimate the fair stock value of a company. For this purpose, we applied the discounted-earnings-plus-equity model developed by EFS Investment analysts to the Apple case. The calculations based on this model allow us to suggest the following: At a price of about $444, Apple stock is considerably undervalued. According to the discounted-earnings-plus-book-value model, the fair-value range for Apple is between $954 and $1,089 per share. Hence, EFS's fair stock price valuation indicates that currently undervalued AAPL stock has at least 115% upside potential to reach its fair value.

Final Words

The qualitative and quantitative analysis is in favor of Apple, no doubt. Apple stock is underpriced as compared to the industry averages and its competitors' stock. Higher profitability, undervalued stock, and high market performance make Apple a reasonable choice. To create a balanced and healthy portfolio, investors can also invest in both Google and Apple as these are the only companies in the industry, which are expected by the analysts to grow the most within the next few years. An existing investor should hold the stock at least for the next few months to let the price boost and the stock be fairly priced in the market.

Source: Can Anyone Breach Apple's Moat? Part 2