Apple's (AAPL) recent fall to a P/E of just 15.6 may be a sign of coming trouble or, as I think, merely a stretching exercise.
There are real signs of trouble. The troubles at Foxconn, the Taiwanese-based company that makes the iStuff in China, are not going away. Early sales of the iPhone disappointed analysts. Then there are a host of new products -- Android- and Windows-based mostly -- all aimed at taking little nicks at the company's market share, and at super-low prices.
But most of these problems are short term. The problems at Foxconn can be dealt with, and raises would add minimally to Apple's costs. The "disappointment" is the result of supply problems, not demand.
But here's the key number: $300. That's about how much profit Apple makes from each iPhone sold. A teardown of the new model from iSuppli reveals a bill-of-materials cost for the iPhone 5 of $199, not far off from that of the iPhone 4S it replaces. The company is dropping prices on the older models to cover the low end of the market at minimal cost. It can win any price war.
But that assumes it has to fight one. There is no indication it has to. While its rivals can produce equivalent products, in a hardware sense, and dramatically undercut it on price, there is no indication as yet that Apple is having any trouble maintaining its price points.
Is the supply chain stretched? No, these other companies are getting similar products at similar prices. Is its manufacturing troubled? Not really, because that problem can be easily solved with money and there is plenty to go around -- its labor problems are more on a par with the NFL's referee situation than with its earlier problems with players. It's a nuisance, not a threat, from a financial standpoint.
Is there anything else on the horizon? Nothing but good. There will be new iPads, there will (eventually) be an Apple TV product -- and all that will be accretive to earnings. Its PCs continue to gain market share -- 27% and with a bullet.
Is a 15.62 P/E too much to pay for this kind of stock? No. It's a premium to the general market, but not an untoward premium based on the company's growth prospects.
I think there will come a time when Apple will be stretched. When content becomes the focus of profit that will be a problem because its hardware margins are so fat. There is always a risk of arrogance -- what is its new "spaceship" headquarters building in Cupertino but an expression of arrogance?
Frankly, I'd be more worried about Google (GOOG) at these levels. Both companies remain big winners, however, and the current recovery has barely started.