Is Apple Worth More Than $400 a Share?

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Includes: AAPL, MSFT
by: David Klein
Here is one view of Apple (NASDAQ:AAPL) based on the numbers. I’m not going to get into how wonderful Apple products are, or the genius of Steve Jobs. but instead will focus on the financials as they relate to fair value, then look at possible risks.
First up are operating income and earnings:
3yr op income average (y)
Operating income (y)
EPS (y)
EPS increase
Year
-87.3
25.0
0.10
2003
140.0
349.0
0.36
260.00%
2004
674.7
1650.0
1.56
333.33%
2005
1484.0
2453.0
2.27
45.51%
2006
2837.3
4409.0
3.93
73.13%
2007
4379.0
6275.0
5.36
36.39%
2008
7474.7
11740.0
9.08
69.40%
2009
12133.3
18385.0
15.15
66.85%
2010
17391.8
22050.5
23.09
52.41%
2011
21895.1
25249.7
26.44
14.51%
2012
26139.6
31218.0
32.68
23.58%
2013
30634.5
36044.0
37.73
15.46%
2014
35129.4
40870.0
42.78
13.39%
2015
39624.4
45696.0
47.83
11.81%
2016
17.90%
15.69%
15.68%
14.51%
2012 - 2016
3yr op income average (y)
Operating income (y)
EPS (y)
Next yr est to Curr yr est
13.40%
Click to enlarge
Projections are arrived at by calculating the statistics for a trend line by using the "least squares" method to determine a straight line that best fits the data. Projected growth thru 2016 averages about 13.4%.
Analysts are even more optimistic, with five-year growth rates of 16%, although it’s important to note they expect growth to slow to single digits after 2013 as shown below. (Source: nasdaq.com)Analysts EPS growth rates
Now free cash flow:
FCF
Year
-47
2001
Actual Data
-85
2002
125
2003
758
2004
2275
2005
1563
2006
4484
2007
8397
2008
8946
2009
16474
2010
19584
2011-ttm
TTM
23623
2012
26188
2013
31840
2014
Projected
17.40%
Click to enlarge
Projected FCF growth averages about 17.4%.
The growth forecasts are impressive. We’ll use EPS and free cash flow rates going forward of 13% and 17%, respectively. Running these projections through our pricing model produces a fair value of $411. The stock is trading at a 14% discount based on Friday's close (March 11, 2011). The projection is based in part on discounted cash flow analysis and a modified Benjamin Graham EPS formula. Needless to say, the result is very sensitive to changes in these growth rates.
The consensus 12-month analyst estimates are $430 with a strong buy recommendation. I must admit it’s an impressive performance to date, but I do not see it as a strong buy at this point. Here’s why.
Apple needs to sustain the impressive growth rates shown in the above tables. The larger the company becomes, the more difficult to maintain high rates of growth -- and, with trailing 12-month revenue passing $76 billion, Apple falls into this category. If the longer term average rates were cut to 10%, the fair value, while still impressive, would drop to $349 at a minimum. Lower growth rates would be disastrous for investors buying at these prices.
Eventually the growth rates will drop, just based on the size of the company -- although when that day arrives is open to speculation. Some may say this will never happen at Apple, but I’d bet the same was said about Microsoft (NASDAQ:MSFT) in its earlier days. Yes, I know MSFT has had its own problems, but at one time it was priced to perfection as Apple is today. Who knows what problems may lurk going forward? A few years ago who would have thought Google’s (NASDAQ:GOOG) Android would be as influential as it is today? The point is, things can change at lightning speed in the tech industry.
I do not own AAPL or plan to purchase any in the near future. From my point of view, the discount just isn’t high enough vs. the risk. That’s not to say the stock will not pass the $400 mark in the near term; it just does not fit within my buying parameters at this point. I would rate AAPL a hold vs. the analysts' strong buy consensus at this price.
A summary of all financial details used in the analysis is here.
Additional model information and other stocks screened are found here.
Disclosure: I am long MSFT.