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To say emotions are riding high on Apple stock (NASDAQ:AAPL) is a bit of an understatement. Even as analysts continue cutting revenue and profit estimates, the battle between the bulls and the bears continuse to rage. The bears point to declining margins, decreasing market share, lack of innovation, and poor management when claiming the stock still has a long way to fall. The bulls point to Apple's impressive history, its enormous cash hoard, and its potential new products (iWatch, iTV, etc…) when saying that the stock has finally found a floor.

With all this emotion is flying around, I decided to take a step back and look at some raw numbers to determine whether or not APPL makes sense as an investment at this time. For this article, I want to look at potential EPS for AAPL under various Net Income and share buyback scenarios. There are currently 939MM shares outstanding and 2012 net income was $41.7 billion which gave them an EPS of 44.15. I am interested in seeing EPS in all possible future net income scenarios (increasing, decreasing, and stable) and under a number of different buyback levels.

First let's look at potential shares outstanding under a number of buyback scenarios. The six scenarios I will examine are a flat $10 billion per year buyback, a flat $20 billion per year buyback, a one-time $50 billion buyback followed by $10 billion per year, a one-time $50 billion buyback followed by $20 billion per year, a one-time $100 billion buyback followed by $10 billion per year, and finally a one-time $100 billion buyback followed by $20 billion per year.

Total Shares Outstanding (in Millions)
$10 billion914889864839
$20 billion889839789739
50 - $10 billion814789764739
50 - $20 billion814764714664
100 - $10 billion689664639614
100 - $20 billion689639589539

scenarios. I am not trying to predict what Apple's net income will be in the future, but merely to provide a starting place for generating EPS estimates.

Net Income Under Various Scenarios
Net Income2013201420152016
Down 5%$39,250$37,288$35,423$33,652
Down 10%$37,184$33,466$30,119$27,107
Up 5%$43,382$45,551$47,828$50,220
Up 10%$45,448$49,992$54,992$60,491

When we take these tables together, we can calculate EPS predictions under various scenarios. For the sake of brevity, I will only examine flat, 10% decrease and 10% increase in Net Income here.

Here are the EPS figures for each buyback scenario with flat Net Income:

EPS with Flat Net Income
50 - $10bil$50.76$52.37$54.08$55.91
50 - $20bil$50.76$54.08$57.87$62.22
100 - $10bil$59.97$62.22$64.66$67.29
100 - $20bil$59.97$64.66$70.15$76.65

10% decline in Net Income:

EPS with 10% Decline in Net Income
50 - $10bil$50.76$47.13$43.80$40.76
50 - $20bil$50.76$48.67$46.87$45.36
100 - $10bil$59.97$56.00$52.37$49.05
100 - $20bil$59.97$58.19$56.82$55.88

10% increase in Net Income:

EPS with a 10% Increase in Net Income
50 - $10bil$50.76$57.60$65.44$74.41
50 - $20bil$50.76$59.49$70.02$82.82
100 - $10bil$59.97$68.45$78.24$89.56
100 - $20bil$59.97$71.12$84.88$102.03

As you can see, unless Apple experiences drastically declining Net Income, if they pursue a buyback strategy, it will be almost impossible for its EPS to shrink meaningfully in the long run. To bring this analysis full circle, we still need to examine potential stock prices in each of these scenarios. To do this, I will use the EPS tables that were just generated and assign a PE based on the growth for that scenario. I will use a PE of 5 for the 10% decrease, 10 for flat Net Income, and 15 for 10% increase. To come up with those multipliers I looked at 3 companies in the technology industry currently showing roughly similar PE and net income trends. The three companies I used were Hewlett-Packard (NYSE:HPQ), Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT) for the decline, flat, and increase, respectively.

Flat Net Income assuming PE of 10:

Stock Price with Flat Net Income (PE of 10)
50 - $10bil$507.57$523.65$540.79$559.08
50 - $20bil$507.57$540.79$578.66$622.23
100 - $10bil$599.65$622.23$646.57$672.90
100 - $20bil$599.65$646.57$701.46$766.53

10 % decline assuming PE of 5:

Stock Price with a 10% Decline in NI (PE of 5)
50 - $10bil$253.78$235.64$219.02$203.78
50 - $20bil$253.78$243.35$234.36$226.80
100 - $10bil$299.83$280.00$261.86$245.27
100 - $20bil$299.83$290.96$284.09$279.40

10% increase assuming PE of 15:

Stock Price with a 10% Increase in NI (PE of 15)
50 - $10bil$761.35$864.02$981.53$1,116.20
50 - $20bil$761.35$892.30$1,050.26$1,242.28
100 - $10bil$899.48$1,026.68$1,173.53$1,343.44
100 - $20bil$899.48$1,066.85$1,273.15$1,530.38

These numbers show that as long as Apple is at least able to hold net income steady, then it is undervalued at today's levels (approximately $400 per share as of this writing), as long as they pursue a buyback plan of at least $10 billion per year. I do realize that given the hesitancy that Apple management has shown around pursuing dividend increases or stock buybacks, it is certainly not guaranteed that we will see even a $10 billion a year buyback. If I were running the company I would opt for taking on debt to do a one-time $100 billion buy-back following by buying back $10 billion a year going forward. If Net Income levels were to remain flat over the near future, Apple's capital structure could easily support this, and it would provide a much needed boost to EPS.

The largest reservation I have about owning this stock is management's lack of clarity around generating shareholder returns. The number one thing I am looking for in the upcoming earnings report is direction around how the company intends to handle future distributions. If they lay out a scenario that matches up to one of the ones I have gone over here, it will bode well for their stock price going forward.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.