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I have written a myriad of articles recently on various technology stocks; both overvalued equities like Salesforce.com (NYSE:CRM), as well as unloved tech titans like Microsoft (NASDAQ:MSFT). In all the reading and research I have done on the sector, the one stock that stands out is Apple Inc. (NASDAQ:AAPL). I have not found a single company that has grown revenues, earnings, and cash flow so consistently, with such a low multiple.

Apple Inc., together with subsidiaries, designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players. In addition, it sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. The company sells its products worldwide through its online stores, retail stores, direct sales force, third-party wholesalers, resellers, and value-added resellers. In addition, it sells third-party Mac, iPhone, iPad, and iPod compatible products, including application software, printers, storage devices, speakers, headphones, and other accessories and peripherals through its online and retail stores; and digital content and applications through the iTunes Store. The company sells its products to consumers, small and mid-sized business, education, enterprise, government, and creative markets. As of September 25, 2010, it had 317 retail stores, including 233 stores in the United States and 84 stores internationally.

Valuation and Catalysts
There are so many positive things to highlight about Apple, here are just a few:
  1. Apple is a cash flow machine(it doubled its operating cash flow from end of fiscal year 2008 to end of fiscal end 2010), with cash and short term securities worth north of $65 a share on its balance sheet.
  2. Striping out cash, AAPL sells for under 12 times this year’s earnings and less than 10 times 2012’s consensus earnings.
  3. Apple consistently underpromises and overdelivers. It has crushed quarterly earnings estimates for two years now. Earnings estimates for 2nd Qtr, 3rd Qtr, 2011 and 2012 has significantly moved up over the last ninety days.
  4. AAPL sells for .65 times its expected PEG and is projected to grow revenues by almost 60% in 2011 and over 20% in 2012.
  5. Macbook continues to gain market share, iPad is the most rapidly adopted tech product in history, and new iPhones will be released before end of year.
  6. Given Apple has just over 300 retail stores, it has ample opportunity to expand in that space, given its huge success.
  7. Its earnings, cash flow and revenues are reliable, GAAP compliant, and are rising in tandem; unlike story stocks like Salesforce.com, that will not even have GAAP earnings until after 2012. See chart below (normalized for the different prices of the two stocks).
What could Apple do to unlock more shareholder value?
Hard to criticize a management that has produced so many great products and stock price appreciation over the years, but here are three things I think could move the stock up:
  1. Pay a small dividend. AAPL has ample cash flow and cash on balance sheet to pay a dividend of 2-3%, as it would be drop in the bucket to the company's cash needs and cash flow.
  2. Provide more transparency on Steve Jobs' health and succession plans for the company. The market hates uncertainty.
  3. Split the stock 10 for 1. A lot of retail investors have a hard time psychologically paying $335 for a share of stock. A split that produces a stock priced at $33.50 would stimulate demand and also allow retail investors to employ option strategies easier.
Price Targets
Given Apple’s growth prospects, products, cash flow and valuations, I believe Apple is severely undervalued and is a strong buy. Apple is selling at $335 a share. A more reasonable multiple of 15 times 2012’s consensus earnings of $28.54 seems fair and even conservative given that AAPL consistently beats earnings estimates. That leaves my price target at $430. Price targets are $500 at Credit Suisse, $440 at S&P and Wedbush is at $450.



Disclosure: I am long AAPL.

Source: Apple: The Most Undervalued Equity in Techdom