Apple Looks Correctly Valued; Cheaper Peer Options Available

After our recent post on Microsoft (MSFT), people asked for a quick take on Apple (AAPL). Here it is.

We have the comparator group set as Microsoft ($MSFT), IBM ($IBM), Google ($GOOG) and Hewlett-Packard($HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion ($RIM) - Interactive Analyst Report For $RIM
2. Palm ($PALM) - Interactive Analyst Report For $PALM
3. Qualcomm ($QCOM) - Interactive Analyst Report For $QCOM

$AAPL’s share price is currently trading at US$160.00. This is well up from the 52-week low of US$78.20. The graph below shows the last 12 months of closing prices.

So What Do We Think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$161.63 for $AAPL - 1.0% above the current share price. We see $AAPL correctly valued at the moment. But how about compared to a peer group?

Comparison Analysis

I am going to look at two of the metrics we use at Valuecruncher - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AAPL is trading at 3.66x ($AAPL is being valued at 3.66x last year’s revenues). This compares to $MSFT at 3.08x, $IBM at 1.70x, $GOOG at 5.73x and $HPQ at 0.91x. $AAPL’s profit margins (at the EBITDA line) are 20.9% of revenues.

A dollar of $AAPL revenues is being valued more than a dollar of $MSFT revenues - despite that dollar of revenues producing just more than half the profit of the $MSFT revenues. A dollar of $AAPL revenues is being valued twice as much as a dollar of $IBM revenues - despite that dollar of revenues producing a similar level of profit as the $AAPL revenues.

As we have previously noted - that is some big growth expectations for $AAPL.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AAPLT is trading at 17.51x ($AAPL is being valued at 17.51x last year’s profit at the EBITDA line).

A dollar of $AAPL EBITDA is worth more than double a dollar of $MSFT, $IBM or $HPQ EBITDA. And more than a dollar of $GOOG EBITDA as well. $AAPL is trading at a higher EV/EBITDA multiple than $RIM and $QCOM as well - but it is in the same general ballpark. $RIM is trading at 15.08x and $QCOM at 16.93x.

Summary

Based on our DCF valuation - $AAPL looks correctly valued. Looking at some comparators - the market is valuing $AAPL pretty highly compared to some peers.

On an EV/Revenue basis - a dollar of $AAPL revenues is worth more than a dollar of $MSFT revenues even when the dollar of $MSFT revenues produces nearly twice the profits of the $AAPL revenues.

We believe that if you are investing in $AAPL at the current price, you are paying a full price and there are cheaper options available.

Disclosure: no positions.