After the market's close on Tuesday, Apple (NASDAQ:AAPL) announced earnings for the first quarter of its fiscal year and beat estimates by a mile with earnings per fully diluted share of $13.87. At the Tuesday closing price of $420.41, AAPL is an incredible bargain.
Readers should bear in mind that AAPL's earnings have a seasonal component and the most recent quarter generally is seasonally the best. Nevertheless, AAPL is a real bargain here.
The methodology I use is called EPEE (the ratio of Enterprise Price to Enterprise Earnings) and involves backing out all balance sheet case and calculating the ratio between the price a shareholder is paying for the business itself and the actual earnings of the business itself. AAPL has built up a legendary hoard of cash now totaling some $98 billion or roughly $104 per share. That means, the business itself is priced at $316 per fully diluted share.
I am estimating this year's earnings by using the pre-announcement consensus earnings and adding the per share increment by which the most recent quarter exceeded consensus. I then subtract an amount designed to account for the after tax earnings on the balance-sheet cash. Making these calculations, a conservative projection of current-year (ending in September, 2012) earnings is $38.20 per share. The $316 price that a shareholder is paying for the business is roughly 8.3 times this year's earnings.
Another way to look at this is to think in terms of "earnings yield" (the inverse of the price earnings ratio) - by this metric AAPL's business is yielding more than 12%. AAPL's EPEE and earnings yield are so much higher than bond yields that they reflect an expectation of sharply lower earnings in the future - an expectation that, in fact, is not shared by analysts and has been proven wrong again and again.
AAPL is generating cash at a furious pace. On a year-over-year basis, in the year ending with the close of the most recent quarter AAPL increased its balance-sheet cash by some $38 billion or more than $100 million a day. In fact, in the two hours I have spent researching and putting this article together, AAPL has generated roughly $8 million of balance-sheet cash. The $38 billion in increased balance-sheet cash is worth roughly $40; if AAPL continues generating balance-sheet cash at that pace and the stock price goes up to reflect the increased balance-sheet cash but no increase in the value of the business itself, AAPL's share price should go up roughly $40 per share or nearly 10% per year.
At some point, AAPL will command a higher EPEE; unfortunately, it is impossible to say when the market will recognize AAPL as a growth stock and give it an appropriate valuation. On the other hand, AAPL is generating cash and growing so fast that, even if the EPEE stays the same, the price should continue to increase based solely on the increase in balance-sheet cash and higher earnings.
Disclosure: I am long AAPL.