The purpose of this article is to compare Apple (AAPL) stock to companies in a very different industry. As many of us know, Apple stock has fallen dramatically since its highs of last year. In response, many analysts have performed relative comparisons between Apple and fellow tech companies such as Samsung, Intel (INTC) and Google, (GOOG). This kind of relative analysis shows that Apple's multiples are trading below its peers and the broad market.
We would like to provide an alternative relative analysis by comparing the multiples of Apple against the multiples of two food companies. Why do we want to compare a technology company with a food company? Well, the industry characteristics of a food company are completely different than a technology company. For example, the growth expectations and margins for technology companies are typically high where as the growth expectations and margins for a food company are both low. Therefore, the multiples of the technology companies should be higher than the food company because of those different expectations.
Our objective is to understand if today's valuation of Apple makes sense. Table 1 below displays the P/E of Apple and two food companies, Campbell Soup (CPB) and Heinz (HNZ). We chose these two companies because they have similar dividend yields as Apple and are leaders in their industry similar to Apple.
Table 1: Apple vs. Food Company Comparison
(click to enlarge)
Results from Table 1 indicate that a soup and ketchup company both have P/E ratios twice that of Apple. Does that make sense? In order to justify the P/E ratio of Apple the expectations for earnings growth and decline in margins should be half that of Campbell's and Heinz's P/E ratio. That means Apple as a company should be transitioning in huge way such as Microsoft or even Sony did. Microsoft's current stock price is 50% from its 1999 highs. Apple at $400 per share would be a 43% decrease from its high. If Apple were to have the same P/E as these companies keeping its current stock price constant its EPS would be $21.5. Or assuming the same EPS the stock price should be $880.
Our conclusion is Apple is mis-priced in the marketplace. It does not make sense that two companies that sell food have significantly higher multiples than a company that is still arguably at the forefront of innovation. One can argue that Apple is not at the forefront but one can also argue it is. Therefore, the stock should be priced as if there is some room for Apple to innovate more. The drastic difference in multiples may be a product of Fed policy and US economic growth where defensive high dividend yielding stocks that trade like bonds are outperforming. Even so, the relative valuations are distorted.
Therefore we recommend to Buy an Apple and Sell Ketchup. In other words we recommend one sell Heinz and buy Apple stock because of the mis-pricings in the marketplace.