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Today, Apple (NASDAQ:AAPL) will be releasing its newest iPhone, the 3G S, which offers improvements in speed, memory, and battery life over the previous model, and comes equipped with a new video recording feature. The 3G S also has the latest version of the iPhone’s operating system, OS 3.0, which also seems to have made some improvements over the previous version.

Furthermore, Apple just recently announced it is cutting the price of the iPhone 3G by 50% to $99, as it ushers in the newer model. As investors ponder the impact of the release of the iPhone 3G S, as well as the price reduction of the iPhone 3G (we won’t even mention the questions regarding Steve Jobs’ health), we thought it would be timely to show the Value Expectations embedded into Apple’s stock price necessary to justify it's recent peak, trough, and yesterday’s closing trade. These expectations assume that Apple will maintain 3 year median levels for both EBITDA margins and Asset Turnover.

click to enlarge

AAPL Trading Price

Chart A


Source(The Applied Finance Group)

In December 2007, Apple's stock price hit a high of $199.82 and along with that came some pretty big expectations to support that price. To justify that trading price now, Apple would have to grow sales by approximately 22.7% over the next five years. This translates to about $90 billion in annual sales by 2013.

Chart B


Source: (The Applied Finance Group)

On January 20th 2009, Apple's stock price hit a low of $78.2 and along with that came some very low expectations to support that price. To justify that trading price now, Apple would only have to grow sales by about 1.6% over the next five years. This translates to about $35 billion in annual sales by 2013.

Chart C


Source: (The Applied Finance Group)

Yesterday, Thursday, June 18, Apple closed at $135.88. To justify this price, Apple must generate annual sales growth of approximately 13.9% over the next five years. This translates to about $62 billion in annual sales by 2013.

AFG's Value Expectations interface provides you the flexibility of building your own set of expectations for a company, and will translate those expectations into an intrinsic value for its stock price. In regards to Apple, the answer to whether you should BUY, SELL, or Hold heavily depends on your confidence in the company’s ability to generate annual sales growth of 13.9% over the next five years (as well as the EBITDA Margin and Asset Turnover expectations). If you expect the company to deliver results in line with these expectations, the company would appear to be fairly valued. In the next couple of weeks we will be issuing some new buy ideas. If you would like to be the first to receive them via email, click here to register with Value Expectations.

*AFG’s Value Expectations allows us to understand the Sales Growth, EBITDA Margin, and Asset Turnover a company has to deliver in the future to justify its current trading price. In theory, and in normal circumstances, if the imbedded future performance is very conservative relative to the company’s historical performance, the stock is regarded as undervalued. The table displays the implied future Sales Growth of Apple assuming its EBITDA Margins and Asset Turnover stays at the 3 year median levels.

Source: Apple: Buy, Sell or Hold?