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Mr. Market Seems To Have Finally Gotten It Right With AAPL


On the fundamentals Apple is reasonably priced at current levels.

"To invest successfully.... what is needed is a sound intellectual framework.... and the ability to keep emotions from corroding the framework." -- Warren Buffett.

"Most financial loss and risk can be avoided, if you 're strict about your commitments." -- King Solomon.

"The intelligent investor should act consistently as an investor and not as a speculator" -- Ben Graham.

"The stock market is filled with individuals who know the price of everything, but the value of nothing" -- Phillip Fisher.

It's another new year and once again everyone has an opinion (mostly bullish) about the world's most popular stock. Price targets are being set for the coming year. Usually the targets are reasonable, but some of them are so extreme and founded on such absurd assumptions that the credibility and motives of the writer are to be called into question.

Whether you're long or short, establishing a price target 50% or more from current levels in a 12 month period is really quite a reach. Could it happen? Of course. AAPL moved from 51.71 on about Black Friday of CY 2011 to 90.63 by the end of September 2011 (peaking on 9/21/2011 and up 75%). It then proceeded to start giving back most of the run-up until by the end of June 2013 it was back down close to where it began back at Thanksgiving 2011 (54.80 at the end of 6/2013). So if you took the roller coaster ride over 19 months or so holding your position all the way through you watched as the stock price moved up by just under 6% total.

Of course since June of 2013 AAPL has moved up to the current price of $109 and a bit of change. That's almost exactly a doubling in value over an 18 month period. So maybe the extreme price targets aren't so outrageous after all? Yes, they still are. Here's why....

Apple's Fundamentals By Year (5 Year View)

The crucial metrics (in dollars, billions):

  2010 2011 2012 2013 2014
Sales 65.07 108.6 155.97 170.87 182.35
Gross Profit 25.57 44.52 68.06 63.63 70.38
Net Income 14.01 25.92 41.73 37.04 39.51

Growth (2009 to 2010 growth rates omitted for the context of this table beginning in the latter year):

  2011 2012 2013


Sales 66.9% 43.62% 9.55% 6.72%
Gross Profit 74.12% 52.86% ( 6.51%) 10.62%
Net Income 84.99% 60.99% (11.25%) 6.68%

The above charts are familiar to regular followers on Seeking Alpha. As a company, AAPL remains a fabulous money machine. However, it's impossible to escape the slowing of growth. The top line has continued to grow, but the rate of growth has slowed down considerably. Gross profit and net income don't need much discussion. Not only did both numbers decline from 2012 to 2013, net income was lower in 2014 than in 2012. Another author pointed this out and I rebutted it, in part, because Apple has made a substantially greater investment in physical plant and research since 2012. That explains away part of the decline, but not enough to get too excited about. Adjusting for plant and R&D has the bottom line growing, but by a few percentage points from 2012 to 2014.

This is all looking in the rear view mirror you correctly point out. The company is going to have a monstrous 2015 on the wings of the iPhone 6/6 Plus, expansion into the insatiable Asia markets and possibly the iWatch you shout. It could very well happen and I hope it does, but that makes us all speculators (see the quote from the famous Mr. Graham above).

Apple's Fundamentals: The Key Ratios

These metrics have been taken after the close of trading on Friday January 2, 2015.

  AAPL Industry S&P AAPL (5 Years)
Price/Earnings 17.0 18.3 18.6 14.5
Price/Sales 3.51 2.1 1.8 3.3
Price/Book 5.7 4.1 2.7 4.6
Dividend Yield (%) 1.7 1.6 2.1 --
Forward PEG 1.1      

So what do these metrics tell us? For years Apple investors were complaining about the low P/E ratios. Note the 5 year average of 14.5. That has loosened up and AAPL is now more aligned with how other companies are valued. The happy news is that the P/E is still below the industry and the broad S&P averages. The other side is that investors have been more aggressive in pricing future growth into the current price. The increase in Price/Sales and Price/Book further support this conclusion. We're more forwardly bullish than we have been. Apple could have a monster 2015 and that, at least in part, has already been discounted into the current price.

As investors we love to see low forward PEG ratios. That is simply calculated by taking the projected P/E and dividing by projected growth. Depending on the forecasting platform you use and the window, be it single year, 2 years, or a 5 year average (I've used Morningstar as of 1/2/2015 for 1 year), AAPL's PEG is in a range between 1.1 and 1.4, give or take a bit for marginal outliers. Average growth (of earnings) is about 13% over 5 years and 19% in the current year. Those PEG's are respectable but not awe inspiring. Those growth rates appear aggressive, but achievable.


So where does this get us?

(1) Apple has been a tremendous growth company beginning with the iPod and accelerating with the iPhone and then again with the iPad.

(2) Growth has slowed down (in percentage terms) in the last 2 years across the critical metrics that matter to investors. An intelligent investor needs to take account of this and not pretend that it hasn't happened.

(3) Price multiples have loosened so that Apple's current price at about 17 times earnings is reasonable relative to other companies in its space and the broader S&P. Apple's projected growth has likely already been discounted into the current price.

(4) The stock has been on a roller coaster ride since the fall of 2011. An average month from December 2011 through December 2014 has seen the price change, up or down, by 6.4%! If you don't have the stomach for such surges and take profits prematurely or panic and sell, you shouldn't be in it.

(5) There are a significant number of investors who buy/sell on trends. They'll ride the trend until it exhausts itself and change directions. Apple's the most popular, liquid stock that there is and has displayed unmistakeable trends. If you see the trend start to shift don't sit there like a lump and try to rationalize it as you watch the price go the wrong way. Get out!

(6) Be aware that many people busted when the price went south in FY13. See Andy Zaky. Everyone was convinced that the stock could only go up when it hit 700 (at the time) in September 2011. By the time the price started shooting back up, they were out of the market, discouraged and didn't have any ammunition to take the ride back up.

(7) And finally, would I be a buyer or a seller here? Well, actually my portfolio is already overweight AAPL so I'll be a holder. Given that I'm a holder, if I didn't hold the stock I'd be a cautious buyer, but I wouldn't come in until after Q1 earnings. I'll hedge a bit w/ puts Everyone's already expecting a blow out quarter. If it exceeds everyone's wildest expectations and the price moves up, it's time to get in. Buying before the announcement could give you a big pop or a big thud. Remember, don't be a speculator, be an investor!

P.S. DON'T SHORT THIS STOCK. There are enough dog companies to look for shorting opportunities on. Why short the best company in the world?

P.S.S. My analysis seems to tilt bearish so why am I still in the stock? Well, I won't be in if it starts moving too far against me and usually when I've bet against AAPL I've been sorry after.

Disclosure: The author is long AAPL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.