It's a great time to be an Apple (AAPL) investor. The stock recently hit an all-time high of over $648, and Wall Street is saturated with chatter about the upcoming iPhone. AAPL is still the most astute equity investment. Here's why:
A day in the life of Apple stock. High, higher..and even higher!
Technicals are essentially indicators that are used to quantitatively assess the value of a stock.
The Price-to-Earnings Ratio (P/E Ratio)
Apple is cheap
The P/E Ratio is the closing price of the stock divided by the earnings per share, in one year. It is a basis used to gauge the relative valuation of a company. A P/E Ratio of 20 or less is considered favorable. Apple has a P/E ratio of 15.23. So even though Apple stock may appear to have reached nosebleed levels, considering its recent rally, the stock is relatively cheap when looking at the company's earnings. Apple's relative valuation is cheap, compared to its competitors. The August 17, 2012 Thomson Reuters Apple stock report indicates that the median P/E ratio of Apple's large competitors is 17.1. The average P/E ratio for the same group is 67.3, although this figure appears to be skewed by Fusion IO. Fusion's P/E is a whopping 447.7.
Apple stock is historically cheap
Remember, the value of the stock isn't merely determined by the stock price, it's determined by the stock price relative to the earnings. So a good way to analyze whether the stock price is cheap compared with history, is to compare the P/E ratios over time. Please note the P/E ratios were calculated on August 17, 2012.
- The current P/E Ratio is 15.23. This implies a 7.6% premium over the P/E ratio at the time my last Apple article was published, on 28 February 2012. Concurrently, the price of Apple stock has risen by approximately 25% over the same period. Essentially, earnings increased at approximately 90% of the rate of the stock price, so the dramatic price increase is largely justified
- The P/E Ratio 5-year average is 24.6
- 1-year Trailing P/E is 17.7, implying the relative valuation is at a 28% discount to history
- 1-year Forward P/E is 11.6, implying expected future valuation will be approximately 30% cheaper than history
Apple is cheaper than other big name companies
Apple's forecast is strong growth
The PEG Ratio is an indicator that assesses future growth of a company. It is the P/E Ratio divided by Long Term Growth. Anything below 0.8 is favorable.
- Apple PEG is 0.6
- That's at a 65% discount compared with the S&P 500
- That's at a 42% discount compared with the 5-year Apple PEG of 1.0
Apple is trending up
The moving average is the average of closing stock prices over a specified time. The current stock price is compared with moving averages to assess the trend of a stock. Generally, if the stock price is greater than the 50-day moving average, which in turn, is greater than the 200-day moving average, the stock is trending up.
- The 200-day moving average is $573.83
- The 50-day moving average is $608.01
- The current stock price is $648.90
...Do the math
There are a lot more technical indicators used to analyze the value of a stock. I highlighted some of the main tools to show that even though Apple may appear to be expensive given the radical surge in prices over the last few weeks, it's actually a relatively cheap buy. So let's look at some of the fundamentals that support the indicators.
Fundamental trading involves qualitatively assessing the value of a company by tracking company actions, strategies etc.
- The iPhone 5 is expected to be revealed on September 12. Some industry analysts forecast 250 millions units being sold.
- Although Apple may have saturated its markets in the U.S., demand in China is extremely strong. Sales have been increasing significantly in China, and should continue to do so due to the burgeoning middle class and rapid urbanization.
- Apple offers a 1.7% dividend yield. This yield is extremely rare for high-growth companies.
- The DOJ probe is attracting political opposition. Furthermore, the maximum liability of the lawsuit is a fraction of Apple's cash hoard.
- Apple is engaged in a seemingly childish legal dispute with Samsung, in regards to copyright infringement. The presiding judge has referred to some of Apple's witnesses as "ridiculous...Unless you're smoking crack, you know these witnesses aren't going to be called." Such statements have the potential to tarnish the company's image.
- Consumer electronics is an ever evolving world of fads and preferences. Apple needs to continually provide appealing products to maintain relevance and that creates uncertainty.
- Competitors such as Google's Android have been eating into Apple's market share.
- Exchange rate risk associated with foreign sales. This can be mitigated through hedging with foreign/U.S. currencies, although the risk is still present.
Disclosure: I am long AAPL.