Given its popularity we've never written an article on Apple (NASDAQ:AAPL) in the 6 months we've been writing for Seeking Alpha, simply because there are so many articles published on the company and the stock, that "everything" has pretty much been said, from every angle and perspective. However, looking at forward earnings growth versus historical growth is a fundamental analysis perspective that we haven't seen covered.
Apple has come off its highs by $100 per share and is now testing its 200-day moving average near $600 per share.
I do worry that a company with a market cap that size and being such a large percentage of the S&P 500 could suffer from the "law of large numbers" rule, but from our view the slower growth is already discounted in the stock price.
If we do look at the history of revenue and earnings estimates for Apple they tell an important story:
|Year||EPS||y/y gro||Rev's ($ ml)||y/y gro|
* Source: internal spreadsheet, with consensus estimates taken from ThomsonReuters within 48 hours of last earnings report
The point being that forward earnings and revenue estimates already discount a remarkably slower rate of growth for AAPL than we've seen the last 5 years.
More importantly, when we look at AAPL's valuation "ex-cash", here are the important valuation metrics, both with, and then extracting, the $128 in cash per share, currently residing on the balance sheet:
|Metric||$600 p/s||$472 p/s|
|2014 p/e||10 (NYSE:X)||8|
|price to cash-flow||11||9|
|price to free-cash-flow||13||10.5|
There is $121 billion in cash on Apple's balance sheet, which after subtracting from the market cap, gets us to our cash-flow figures.
Unless a reader thinks that Apple will grow revenues, earnings and cash-flow, at low to mid single-digits for the foreseeable future, the stock is a compelling value at its current price, and even a whole lot higher too.
The question remains; "What does Apple management do with the cash hoard?" Hopefully not a sizable acquisition. I'm not a fan of big acquisitions, but if you look at Cisco (NASDAQ:CSCO) and IBM (NYSE:IBM), you see a strategy of smaller, bolt-on acquisitions that seems to work well.
We think that the capital allocation around the cash position could be the next major catalyst for the stock price, outside of the expected strong holiday season. Given the fiscal cliff in 2013 and the expectation for higher capital gains and dividend income rates, a substantial share repurchase program would be the better use of cash today, versus a major acquisition.
AAPL's book value is close to $125 per share, so it is unlikely that AAPL will ever trade below that these days, but the stock is currently trading below its intrinsic value (according to Morningstar), which Morningstar puts at $770.
Another angle I haven't yet seen covered on Apple is the impact of rising rates on earnings per share: a 1% interest rate on that $121 billion cash balance is an additional $1.28 in earnings per share, or a 3% increase in earnings per share, alone, before operations. (Granted that is a quality of earnings issue and isn't considered as important as growth from operations, but interest rates matter to Apple.)
Only time will tell, but we think the think AAPL's price is right at $600, and even down to $550, absent a nuclear winter in technology and consumer spending.