Looking at Apple’s Value

If you haven’t heard yet, Apple ($AAPL), which I believe is some sort of fruit company, reported outstanding earnings yesterday. For the last nine years, the shares have gained an average of 1% each week. When looking at this company’s numbers, words really do fail me.

What you can’t do with words you can do with a chart, so below I’ve made a chart of Apple’s stock along with its earnings-per-share. What’s incredible to me is that the stock is still going for a fairly decent price.

The blue line is Apple’s stock and the red line is Apple’s earnings-per-share. The black line is Wall Street’s earnings forecast (I’ll have more on the black line in a moment.) The blue line follows the left scale and the red line follows the right scale.

The two lines are scaled at a ratio of 16 to 1 which means that whenever the lines cross, Apple’s P/E Ratio is exactly 16. I don’t mean to suggest that’s the appropriate multiple for Apple. I used 16 simply because it makes the chart more readable.

About the black line. Apple’s earnings yesterday not only exceeded Wall Street’s forecast but also beat the forecast for the same quarter one year from now. As a result, it appears that Wall Street expects an earnings slowdown. Of course, this isn’t true because analysts will most certainly revise their estimates much, much higher.

For now, I think the best way to view Wall Street’s forecast is to imagine the black line extending from $41 currently to roughly $57 by the end of next fiscal year (September 2013).

With trailing earnings of $41 per share, an earnings multiple of 16 translates to a price of $656. If Apple can earn $57 next fiscal year, then 16 times that comes to $912. I’m not saying Apple will do this, but I believe these are very reasonable assumptions.

Actually, this may understate Apple’s P/E ratio due to the company’s giant pile of cash. The company has an astounding $110 billion in cash. That’s roughly $116 per share. That $116 is probably contributing almost nothing to Apple’s bottom. I mean…have you seen short-term interest rates lately? The only info I have is from the earnings report which lists “other income” of $148 million. Annualized, that’s about 0.5% of Apple’s cash horde.

So to properly look at Apple’s value, we need to apply a multiple to an earnings forecast and then add $116 to that. By the way, Apple will soon start paying a quarterly dividend of $2.65 per share which comes to $10.60 for the year.

Addendum: Here’s the same chart but with a log scale. I apologize but I don’t know how to make a readable log chart excel chart, so you’ll have to do with seeing the log value on the y-axis. It gets the point across since you can see the earnings line climbing at a consistent rate.

Notice how slightly the recession impacted Apple. You can also see how conservative the earnings estimates are compared with Apple’s earnings trend.

(Instead of a ratio of 16 to 1, this chart has a log spread of 1.2 which comes to a ratio of 15.85 to 1, so it’s nearly the exact same.)

Posted by on April 25th, 2012 at 10:42 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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