What Apple's Profit Margin and P/E Ratio Would Mean for Competitors

|
Includes: AAPL, BBRY, DELL, HPQ, LNVGY, NOK
by: Benjamin Goldman

Apple Inc. (NASDAQ:AAPL) is a highly rated stock, with a market cap of $350 billion and only $65 billion in revenue in 2010. However, its $14 billion in net income, high growth potential, and its $76 billion in Cash and Investments make Apple a Strong Buy at anything under $400 per share. Out of all the other top computer hardware firms, nobody comes close to Apple in terms of Market Cap.

Apple is known for having a high mark-up as a result of its trendy brand and innovative products. The company currently has an average gross profit margin of 39.36% over the last 4 quarters and a P/E ratio of 15. I set out to decide how much Apple's competitors in the hardware space would be worth if they had the same gross profit margin and P/E ratio as Apple. Presented below are my results, with a detailed explanation following.

% Increase In Value

In Billions

Company

Ticker

With P/M

With P/E

With Both

Real Market Cap

New Market Cap

HP

HPQ

177.96%

87.97%

422.47%

$ 67.49

$ 352.62

Dell

DELL

382.32%

67.04%

705.66%

$ 28.28

$ 227.84

Lenovo

OTCPK:LNVGY

1715.02%

-36.20%

1058.03%

$ 6.37

$ 73.77

RIM

RIMM

-21.31%

301.07%

215.59%

$ 12.36

$ 39.01

Nokia

NOK

130.69%

43.95%

232.09%

19.07

63.33

Click to enlarge


Lenovo (OTCPK:LNVGY) would have the largest increase in value since its gross profit margin is only 11 percent, almost eliminating the bottom line entirely. The P/E ratio is already higher than Apple's since Lenovo has such high revenue and a potential for more earnings if it can find a way to cut costs or become more innovative. Research In Motion (RIMM) actually has a higher profit margin than Apple and would lose 21.31% of its value with Apple's gross margin. A big reason for RIMM's recent decline is that analysts believe it has an inferior product to the iPhone and the Droid. For the BlackBerry to maintain its market share long term, the company will have to focus on outpricing competitors and lowering margins, thus eliminating substantial value.

HP (NYSE:HPQ) would be valued very similarly to Apple with the same gross profit margin and P/E ratio, even though it almost doubled Apple's earnings in 2010. This stems from HP's much higher operating expenses and debt. All in all, it's very surprising how tweaking two ratios can have such an astounding effect on stock valuation and explains why picking the right stocks is so difficult. Apple would be seriously devalued if it had a 25 percent gross margin, the average profit margin of its competitors. Its Market Cap would decrease by 50.5 percent.

After conducting this analysis, I have realized how much a strong brand leverages value. Apple's value is driven mostly by its strong product image that allows it to have higher margins. It shows how if Apple's competitors could improve their brand images and fetch a higher premium, their shares too can skyrocket. This makes any computer hardware company a solid BUY if you believe that it can innovate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.