In my last article, “Apple: Still a Low-Risk Buy”, I received a comment which pointed out that my future P/E assumptions for Apple were low given my projected EPS growth rates through FY12. In the article I developed price ranges for FY10, 11 and 12 based on EPS of $15, $20 and $25 respectively representing annual growth rates of 65% (FY09 to FY10), 33% (FY10 to FY11) and 25% (FY11 to FY12). Future price ranges were based on recent crisis P/Es for Apple of 13 for the low, 17 on average and 21 for the high. All these P/E I’m using are much lower than the EPS growth rates assumed. How can I use future P/Es which place the PEG ratio well below 1.0? Lets take a look at history.
I would love for the market to start paying up for Apple as it does for Amazon (AMZN) or Netflix (NFLX), but history shows a persistent low PEG for Apple. Below is a graph of the PEG ratio for Apple going back to October 2006. The blue line equals actual P/E divided by the actual (vice projected) forward twelve-month earnings growth. The red line equals the actual P/E divided by my projected forward twelve-month earnings growth.
The increased PEG in 2007 is due to Apple's first climb towards $200, which was arrested by the financial crisis.
Financial websites will not show today’s PEG ratio at these levels because of what I consider a low consensus EPS for FY10 and FY11 of $13.32 and $15.40 vs. my conservative estimates of $20 and $25. Additionally the PEG ratio can be calculated different ways. For example: Yahoo! Finance uses a 5-year expected growth rate for calculating PEG. In general, analysts are overly conservative on Apple earnings estimates and the farther out the estimate, the more conservative they get. For this reason, published PEG ratios for Apple are inflated.
History shows that investors have not been paying for Apple’s true growth potential. Right now, Apple shares can be picked up at a one-year PEG of 0.3 to 0.4, which is historically low, and will probably get a bit lower as the market stays manic over the EU sovereign debt crisis.
Disclosure: Author holds a long positions in AAPL