Key Analyst Says Little Downside For Apple

| About: Apple Inc. (AAPL)


Gene Munster of Piper Jaffray came out with positive comments on Apple this morning.

His reasoned analysis points out some upcoming positive catalysts for the shares.

The shares continue to have one of the lowest valuations for a large cap in the overall market. The stock seems closer to a floor than a ceiling.

Gene Munster, a five-star analyst according to TipRanks, of Piper Jaffray came out with his latest opinion on Apple (NASDAQ:AAPL) today. He sees little downside to the shares, as the company is "in a favorable position to defend the stock using a modest dividend increase, or repurchases with March quarter earnings".

I agree with his assessment, as Apple purchased some ~$12B of its own shares after a post-earnings decline caused the shares to drop near the $500 a share level in January, which I have stated looks like the bottom of a narrow trading range the stock has been in throughout 2014.

Mr. Munster goes on to say that expectations for the iPhone 6 are very low, and any surprises are likely to be to the upside. He has a price target of $640 a share on the tech giant from Cupertino. This is near the $635 a share price target Pacific Crest put out in early March, and feels like a good twelve-month target.

A recent story in StreetInsider speculated Apple will raised its stock repurchase program by $25B to $50B, and also hike its dividend by ~20% when it reports earnings on April 23rd. This would bring the company's quarterly dividend to ~$3.65 a share, which would give it an approximate 2.8% dividend yield at current levels. A dividend hike announcement would also coincide roughly with the same time period Apple announced its last dividend raise.

Obviously, earnings would have to be pretty disappointing for this type of announcement to not buoy the stock. Mr. Munster's thesis that the shares have little downside from here would have solid credence if these capital allocation moves do indeed incur.

Third-quarter performance for the stock will be driven most likely by the announcement of the launch of the iPhone 6. The new version of Apple's iconic franchise will, in all likelihood, have the larger screens that have been so critical to Samsung's growth. This development should also be well-received by investors and customers who have been clamoring for some time for this feature.

It is important to remember that most of Apple's stock gains last year occurred in the third quarter on the announcement and launch of the iPhone 5C/5S. I see no reason that the same trajectory does not play out in 2014.

I feel quite strongly that the bottom edge of Apple's trading range of $500 a share will hold throughout the year. The floor of this range could easily be bumped up if the tech giant does significantly increase its dividend and/or stock repurchase program. I have been selling out-of-the-money puts in the $520 to $525 range on a rolling monthly basis to collect premium and/or get a lower entry point to pick up additional shares. So far, I have only collected premium income.

The company has one of the cheapest valuation of any of the large caps in the market right now once its over $150B in net cash and marketable securities on the balance sheet are accounted for. Doing this, the stock is selling at under 9x this year's expected earnings, compared with the overall market multiple of ~16x forward earnings. Revenues are expected to grow in the 5% to 7% range this year, and the stock has a five-year projected PEG of under 1 (.60). S&P 500 sales are expected to increase just 4% Y/Y, in comparison.

In summary, it appears Apple's stock is much closer to its floor than to its ceiling. Upcoming catalysts could push the shares higher in the near future, and expectations are low for Apple at the present time. The stock continues to be a core position in my value portfolio for these reasons. I expect brighter days for the company and shares in the month ahead.

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.