For Apple, Upside Remains

Apple (AAPL) reports its March quarter next week. The stock sits near its 2009 high, up about 40%. Each time the stock has pulled back buyers show up and take it right back up.

Recently, the chatter on the street has been bullish as iPhone and Mac demand appears to be holding up better than expected. Apple seems certain to report a quarter better than its guidance. This is widely expected and analysts are ahead of guidance. Estimate increases are far outpacing estimate cuts.

Investors have been worried that Apple's premium priced products would falter in the tough economic environment. This does not seem to be the case, as market share gains continue to offset macroeconomic weakness.

Other factors helping the stock are Research in Motion's (RIMM) strong earnings report and less worry about the future of Apple without Steve Jobs. I think many investors are missing the big picture on smartphones – their penetration is rising so fast in the U.S. that the market is healthy enough to easily accommodate Apple and RIMM.

As for Jobs, I've noted before that Apple is at a point in its product lifecycle where changes are evolutionary. Even a move to a netbook is not much more than a larger form factor iPod touch. This is an ideal time for Jobs to be sidelined as it is even more about operational execution than usual. Furthermore, operational execution is massively underappreciated by Apple observers who focus on product rumors, unit volumes, and average selling prices. Those things are important but have always been in the stock price equation. Operational execution was not in the stock price. It is also Tim Cook's, the heir apparent to Jobs, strength so the timing for the stock is even better.

If the economy recovers into 2010, Apple shares could rise significantly as estimates begin to move up. The current 2010 consensus is $5.94 vs. $5.10 in 2009. If 2010 goes comfortably north of $6, I could see the stock nearing $150 later this year based on a 20 P/E and giving credit for what will be more than $30 in cash presently earning just 1%.

I'll be back next week with a detailed preview of the quarter but remember the stock will react to guidance much more than the quarterly results.

Disclosure: Apple is widely held by clients of Northlake Capital Management, including in my personal accounts.

Comments

[Arnold Rein...:]

I agree with the upside, but I don't agree that Apple can prosper on execution alone. Technology keeps improving and Apple must continue to deliver innovative products that those improvements make possible if it wants to stay out of the commodity end of the market. Should Jobs be unable to continue, they better show they have leadership that can perfect and bring to market the innovation their talented staff develops.

Apr 17 08:12 AM

[t0000:]

Apple's FY '10 EPS will be in the $7 range ($7.20+) and why would you use a 20 p/e? Just throwing random numbers out there. At least give a reasonable range. Apple has historically traded as high as 138 P/E. I think a more reasonable assumption would be in FY '10 based on estimated $7 EPS using a P/E range of 23 - 45 apple could be trading any where from $161-$315. Given this information you decide what P/E you want to use as an investor and good luck.

Apr 17 08:35 AM

[t0000:]

If you use NON-GAAP Earnings which would actually make a real comparison to other tech companies as they do not carry as great of a difference from GAAP to NON-GAAP apple is trading at a 0.45 PEG ratio (ttm)

Apr 17 08:40 AM

[Steve Biren...:]

Thanks for the comments. I think a 20 P-E is reasonable in an environment when many other stocks are trading at 10-12 times earnings. I think a long-term normalized P-E for the market is 15. A 33% premium for Apple is appropriate.

As for $7.20. I can get there in my spreadsheet but it requires aggressive assumptions. Tell me about your math.

Apr 17 10:30 AM

[Michael Comeau:]

On that 138 number, are you talking forward or trailing?


On Apr 17 08:35 AM t0000 wrote:

> Apple's FY '10 EPS will be in the $7 range ($7.20+) and why would
> you use a 20 p/e? Just throwing random numbers out there. At least
> give a reasonable range. Apple has historically traded as high as
> 138 P/E. I think a more reasonable assumption would be in FY '10
> based on estimated $7 EPS using a P/E range of 23 - 45 apple could
> be trading any where from $161-$315. Given this information you
> decide what P/E you want to use as an investor and good luck.

Apr 17 10:41 AM

[t0000:]

Oh, Nice some actual analytical questions and not just normal internet jargon......Sorry I was working today and wrote this before my real day began......... @ Michael 138 P/E was ttm P/E. Look at amzn or rimm use to trade at 90 P/E in 2007 while goog and aapl traded 45.

@ Author, it will take to long to show you FY '10 earnings but use this as guidance.... Deferred Rev My Friend "Linear earnings thanks to........ SARBOX" in a recession....Right place at the right time....Apple, Inc.....

This is how you find Apple's EPS using Munster's Data....

Mac Sales @ 2.2 Million @ $1,500(ASP)= $3.3 Billion
iPod sales @ 10 Million @ $178(ASP)=$1.78 Billion
iPhone @ 4.4 million @ $600 (ASP) = $1.577 Billion (w/Def Rev)
Other Music = $1.10 Billion
Peripherals/Other = $380 Million
Software = $570 Million

All equates to $8,707 Billion top line.......

I'll let you figure out your own bottom line but your looking at $1.449 - $1.507 EPS using his data......

Remember Piper Jaffray makes a market in AAPL.

Disclosure: Munster has a $0.98 EPS target on AAPL.

Apr 17 07:55 PM

[t0000:]

Also @ author, I did not realize you were using 20 P/E looking forward........Sorry, I haven't been looking at the market like that, I've been playing it quarter by quarter and using (ttm) So In you r theory yeah 20 could be fine in your eyes....I am just looking at....What people will pay instantly....best of breed with 80% of people that don't understand their balance sheet....Apple will trade up into the future.....
This goes to the readers.....You all complain about analyst are so far off, ever wonder why.....there firms make a make a market in apple or indirectly.......What happens when you beat big or disappoint hugely......Shares get traded....Commish........ it takes is a whisper and they could get th number with zero fault every time......remember to always think....................

Apr 17 08:17 PM

[mikesan:]

The good news is that AAPL are the first shares in my portfolio to be back in the black, only 20c per share but still the first. This company is amazing and will continue to amaze as it carries through its very clear strategies to own and dominate those markets it performs in.

Apr 17 09:23 PM

[Infinite loop:]

It's tough to make P/E calls, since both ends of that equation are variables and can fluctuate considerably. It also assumes a fixed point in time rather than the dynamics of variable time horizons investors have.

Biased data mining (all data mining is bias) and hopeful prognostication will lead to false assumptions in any equity. You'd expect MSFT to be a big gainer on fundamentals alone, but we all know how that story has played out over the past decade.

The only thing you need to know regarding Apple's is that their high-end-market sales are holding steady in a very negative environment. Which means when the economy turns Apple is poised for much larger earnings. And that signals a buy on any weakness in AAPL.

Apr 17 11:24 PM

[Steve Biren...:]

I am not against using EPS adjusted for the iPhone deferred revenues. You can make a good case that AAPL has $10 plus annual earnings power today if iPhone sales hold at 4 million plus units a quarter. However, if I were to use the adjusted figure, I would adjust my P-E target lower to 15-18ish. Either way the stock still has upside which was my original point.

Infinite Loop makes a good point on how units are holding up without price cutting which sets the company up well when overall consumer demand returns to more normal levels.

Apr 18 09:32 AM

[mollytjm:]

it's not execution alone... innovation at Apple is a given...that's who they are. The point is that execution is important and the continued brilliance of it, even with Jobs sidelines, has been ignored.
Apple observers have been slow to differentiate today's Apple from the one that Jobs had to come back to save. This is no floundering, one trick pony, barely profitable. Apple is a financially secure company, cash rich and not debt, with a huge moat and brilliant employees. It's hard for me to even imagine a scenario where they don't do well. They're visionary... this means they have a long term plan and they can see where tech is going... because they'll take it there.

Apr 18 10:14 AM

[john1940:]

Apple is a great company but contain your fanboy enthusiasm. Their products are too expensive even compared to inferior substitutes. Apple lost market share in the last reporting period. Phones, Ipods, etc are going to peak sometime in market penetration. How many games can you play or want to on your iPhone? Job's future role is uncertain. It's time for some caution with this stock.

Apr 18 10:50 AM

[GSlusher:]

SLOW? Jobs came back to Apple in December 1996 (or January 1997, depending upon the source). That's **12 BLINKING YEARS**. In January, 1997, Google didn't exist. Amazon had been online for less than 2 years. Since January, 1997, Apple has introduced:

- The iMac (4 generations)
- The iBook (several generations)
- G4 & G5 processors
- Intel-based Macs (iMac, Mac Pro, MacBook, MacBook Pro, MacBook Air, Mac mini)
- OS 7.6, 8, 8.5, 9, 10.1, 10.2, 10.3, 10.4, 10.5
- Cinema displays
- Rack servers

not to mention
- iPod
- iPhone
- Apple TV
- Airport-series routers/base stations, etc

Apple has STOPPED making:

- Printers (remember that the LaserWriter was one of the first successful laser printers, starting in 1985)
- Newton MessagePad PDA
- QuickTake digital camera (forgot that one, I'll bet!)
- QuickTime Video Conferencing Camera

and they got rid of the authorized Mac clones.

If "Apple observers" haven't learned to differentiate as mollytjm suggests, they will never learn--plus, they're not really "Apple observers," as they haven't been observing anything.

On Apr 18 10:14 AM mollytjm wrote:

> Apple observers have been slow to differentiate today's Apple
>from the one that Jobs had to come back to save.

Apr 18 10:57 PM

[Paul H. M.:]

This is a good company. But at over $100/share in this economy? Let's remember, the price has dipped to around 80 a few times in this year alone. As an investment, this stock is a high risk at the current price.

No matter how good the products, more and more people are losing their jobs (and therefore, will not want overpriced Mac products).

I'm selling puts that with striking prices in the 70's and 80's, which is a more fair price for this stock.

I use a windows machine because I can build a faster computer a 1/4 the price. In this economy, many others will do the same.

Apr 19 02:56 AM

[Michael Comeau:]

I would argue that the high price of the stock means nothing - if it split 4 for 1 nothing would change.

It's true that you can build a faster, more-powerful Windows PC for a fraction of the cost of a Mac. But the average Mac buyer is buying based on superior ease of use, security, reliability, and customer service - regular people don't care about specs.

The economy might become a real issue if employment doesn't rebound soon though.

On Apr 19 02:56 AM Paul H. M. wrote:

> This is a good company. But at over $100/share in this economy? Let's
> remember, the price has dipped to around 80 a few times in this year
> alone. As an investment, this stock is a high risk at the current
> price.
>
> No matter how good the products, more and more people are losing
> their jobs (and therefore, will not want overpriced Mac products).
>
>
> I'm selling puts that with striking prices in the 70's and 80's,
> which is a more fair price for this stock.
>
> I use a windows machine because I can build a faster computer a 1/4
> the price. In this economy, many others will do the same.

Apr 19 10:18 AM

[Neil Anderson:]

Continued great work by Tim Cook. Looking forward to his report and comments on Wednesday.

Apr 19 03:04 PM