The other day, I took a trip to the store and saw a large bin with movies and other items just thrown in and marked with a huge discount sign. There are a couple of places that you can usually find hugely discounted items. You could find them tucked away in a remote section of the store, or you can find them right by the front door for every shopper to see as they come in through the door.
I like to look through the bargain bin to see if I can find something in there that I really want. Every once in a while, I will find something in the bin that makes me think, "Why in the world would they throw this in here?" When this happens, I usually call my wife and tell her, "You are never going to believe what I found at a discount!"
If the stock exchanges were a store, you would find Apple (AAPL) sitting right on top of the bargain bin at the front of the store. Everyone knows that Apple is there, but for some reason the big money managers are afraid of the higher per-share price and high valuation (currently $553 billion as I write this) and just throw it back into the bin.
Currently, Apple is trading at a current year P/E Ratio of 12.88 and future year P/E of 11.25. Why is this considered to be an expensive stock? Is there fear that Apple's tremendous growth and earnings are not sustainable? Are they afraid that earnings eventually will not be able to reach close to $50 per share EPS level for the 11 years to justify the valuation?
Let's compare Apple to a few stocks that trade at higher multiples. Amazon (AMZN), Apple's closest competitor trades at an astronomical current year P/E of 137 and future year P/E of 80. Jacob Steinberg wrote an article in January about the justification of Amazon's P/E saying that revenue has been growing based on Amazon Prime, Kindle Fire (although they don't profit from these sales other than sales of e-books) and other possibilities. Amazon is expected to grow their EPS by an average 26.85% compared to Apple's 58.31% growth expectation. Does that justify them having a P/E 10x higher than Apple? I would say it doesn't.
What about Chipotle Mexican Grill (CMG)? This great restaurant is making me hungry just thinking about it. They trade at a future P/E of 38.99, yet they are only expected to have an average growth rate of 36.2% over the next five years. I actually like Chipotle's stock, even at this price because it has a quality product in a chain that is rapidly growing in not only popularity, but in number of locations. But should it be trading at twice the P/E of Apple? It has one growing, great product, while Apple has exponential growth in their smartphone and tablets business, and has a track record for being at the top of innovation.
I also like Baidu (BIDU), who is growing quickly in China, but do they deserve a 21.79 forward P/E compared to Apple's 11.25? The Dividend Kings wrote an enticing article about the prospects of Baidu in 2013, citing their position in China's internet marketplace being comparable to Google's (GOOG) dominance in the US. They are growing their EPS at a faster rate than Apple (by about 29%), but does that warrant that much of a premium over Apple? I don't think so.
Even Wendy's (WEN) trades at a higher P/E than Apple. And Wendy's is not even best of its breed when it comes to fast food chains.
Because of the size of Apple, I don't believe that it should be trading at the same earnings multiple as these other companies mentioned, but I do believe we have found this stock sitting in the bargain bin, and I find myself wondering why. Apple is a top-25 company when it comes to growing their earnings, yet we continue to find them in the bargain bin. Apple is a long-term keeper, and you should pick some up while you can. Even at a measly 15 P/E, Apple is worth $750 per share. Don't let the price and the recent decline fool you. It has finally come down to its 50-day moving average, and Apple will not spend much time below it.
Disclosure: I am long AAPL.