Apple's Compelling Valuation: Should You Buy Before iPhone Announcement?

| About: Apple Inc. (AAPL)

There once was a time where you did not want to buy Apple (NASDAQ:AAPL) right ahead of any big news announcement. Whether it was a product launch, an upgrade, or an earnings announcement, you did not want to buy right before. If you had bought a couple weeks earlier and the stock ran up, it was a good time to get out. Apple would sell off of the news, which in itself would create a good buying opportunity. Well, we know that the selling after earnings announcements was usually due to the company's extremely conservative guidance. Apple has done a better job recently with that, and the last few quarters the stock has jumped after earnings.

But today we stand just one day out of a big iPhone announcement. Sprint tumbled this afternoon after it was reported that the company spent $20 billion to get the iPhone. Now Apple was down today with the overall market, and as you'll see later, has dropped quite a bit in the past two weeks. So the question remains, should you get in before the news, or wait and see if the sell the news theory turns out to work again?

Now, yes, Apple has been down the past two weeks. But what hasn't been? Take a look at the following table. Apple has basically matched the performance of the Nasdaq. International Business Machines (NYSE:IBM) has only held up better because it's not 100% technology based anymore. Research in Motion (RIMM) is down more because of their terrible earnings report recently, and concerns about furious competition. Hewlett Packard (NYSE:HPQ) has bounced around thanks to a CEO shakeup, but their replacement is as big of a question mark as the former. Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), and Intel (NASDAQ:INTC) have just been following suit.

symbol Monday recent high date days since change
AAPL $374.60 $422.86 9/20 9 -11.41%
RIMM $20.50 $24.35 9/19 10 -15.81%
HPQ $22.20 $25.10 9/21 8 -11.55%
GOOG $495.52 $558.52 9/20 9 -11.28%
IBM $173.29 $180.91 9/29 2 -4.21%
MSFT $24.53 $27.50 9/20 9 -10.80%
CSCO $15.19 $16.67 9/20 9 -8.88%
INTC $20.62 $22.98 9/27 4 -10.27%
NASDAQ 2335.83 2643.37 9/20 9 -11.63%
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So why buy before the iPhone announcement? Well, maybe the market opens lower tomorrow and we finally hit a short term bottom. Unlikely. Maybe Apple's news makes the stock bounce off its recent lows. A little bit more likely, but not a great chance. So why then? Well, it's all about valuation.

I've got two tables to support my reasoning. The first one is analyst estimates currently for the stock, thanks to the estimates page at Yahoo Finance. The second is a P/E table based on those numbers. For the two quarterly estimates, I've simply divided by 4 to get a yearly P/E, assuming that quarter's earnings is the same for each quarter of the year.

EPS Numbers 4Q 2011 1Q 2012 2011 2012 Share Price
90 days ago $6.35 $7.80 $24.82 $28.86 $349.43
60 days ago $6.99 $8.70 $27.34 $32.05 $377.37
30 days ago $7.00 $8.65 $27.41 $32.12 $374.05
7 days ago $7.10 $8.74 $27.55 $32.49 $403.17
Current $7.14 $8.81 $27.64 $32.67 $374.60
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P/E Valuation 4Q 2011 1Q 2012 2011 2012
90 days ago 13.76 11.20 14.08 12.11
60 days ago 13.50 10.84 13.80 11.77
30 days ago 13.36 10.81 13.65 11.65
7 days ago 14.20 11.53 14.63 12.41
Current 13.12 10.63 13.55 11.47
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Two months ago, Apple was trading at 11.77 times 2012 expected earnings. Now over that time, the stock is down about 1% and the estimates have come up another 2%, so the P/E for 2012 is now under 11.50. That is really cheap for a growth company like Apple. If you give Apple a P/E of 12 for 2012, and think they'll do much better than current expectations, say $35 a share, you get a price target of $420. That's 12% upside from here. Not bad, you say? Well, I might be in the ultra conservative camp. The average price target for Apple is about $500 right now. That's about 33% of upside from here. The highest target is about $666, which is almost 80% higher than the current price.Now certainly, you could make the case that you should wait and see the announcement before you buy. I'm not 100% opposed to that. The stock could drop after the announcement, and you could get it at $365. The markets could continue dropping and you could get Apple at $350. That would be a steal. Either way, there is plenty of upside in this stock, and I don't think you are wrong if you enter now.

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