Low Expectations And Future Catalysts Make Apple A Buy

| About: Apple Inc. (AAPL)
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The selling pressure that Apple (NASDAQ:AAPL) was under at the end of last year appears to have continued into the beginning of this year, driving the stock back down towards 500 every time it seems ready to break out. This has resulted in Apple trading rangebound at a very attractive valuation, with a forward P/E under 11 even before backing out its $100B plus cash hoard. Also, these future earnings estimates have already come down significantly compared to just several months ago, with the consensus analyst full year 2013 earnings estimates having declined from over $53 a share ninety days ago to under $49 now.

Remarkably, earnings estimates for the first quarter are actually lower than the company earned in the same period last year. This is despite two major new offerings that became more widely available, the iPhone 5 and the iPad mini. Despite persistent rumors that sales of both have been lower than expected so far, holiday sales could still surprise and lead to an earnings beat similar to what occurred in the same quarter last year, when the iPhone 4S was the only new offering. In the recent fourth quarter conference call, Apple's CFO stated that he believes they "enter this holiday season with our strongest product lineup ever and remain very confident in our new product pipeline."

Another catalyst I believe is being overlooked is the company's recently implemented 3 year, $10B stock repurchase plan. While this is practically insignificant compared to Apple's nearly $500B market cap and is mainly intended just to offset new shares granted to employees, it could easily be increased and barely make a dent in the company's cash position. Although they have only committed to purchasing $2B worth this year through a financial institution, if it were to make additional purchases on the open market while the stock price is low, it could remove another 14.5M shares from circulation if the entire $10B allotment is used this year at prices below $550. This would boost annual earnings per share by an additional 75 cents. While this seems small compared to the nearly $50/share the company is projected to earn this year, it would demonstrate that the company can juice earnings growth with buybacks, making the already low PEG ratio even more desirable.

Another possible use of the continuously expanding cash pile could be a strategic acquisition. Netflix (NASDAQ:NFLX) has been a suggested takeover target, and I believe the market would react favorably if a deal was announced, as it would be a clear signal that Apple is becoming more serious about entering the burgeoning smart television market. They could nicely integrate all or a portion of Netflix' content library into iTunes and offer it a la carte directly on the Apple TV box, or its logical successor that would presumably be built directly into an iTV. This long rumored offering of an actual television of its own design could eventually lead to further earnings growth and solve the riddle of where the company's future growth will come from.

This situation would be similar to the company's transition from dependence on the iPod to the iPhone. I'll embarrassingly admit I was skeptical when Apple first introduced its iPhone back in 2007, when I thought "what the heck do they know about phones?" The answer, paradoxically, was "not enough to prevent them from being innovative." I hope you're re-reading that last sentence right now, as it was meant to cause Zen contemplation of the innovator's dilemma. I believe the same perceived lack of expertise could remove barriers to improvement, because it doesn't have to be based on an existing model of, say, a Samsung television.

Clearly there are opportunities for Apple to integrate some of their existing technology via a remote control app for iPhones and iPads, or even the voice assistant Siri to allow users to control the TV audibly. But the main innovations could be something we don't even realize we're missing when we watch TV, as foreshadowed by Apple CEO Tim Cook when he said "when I go into my living room and turn on the TV, I feel like I have gone backwards in time by 20 to 30 years." I have confidence the company will be able to bring the television into the future and usher in the era of the smart TV just like they did with the smartphone.

Even if they can't exactly duplicate the cutting edge innovation and runaway success of the iPod, iPhone, and iPad, I believe the company can still channel its technical ingenuity and supply chain management strength into its still underrated brand name and make the iTV a commercial success. You can currently gain access to that potential at a huge discount, as continuing sales of existing products should still be able to easily support the stock's current valuation, giving you a freeroll on the iTV or any other disruptive device the company might develop in the future.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.