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AAPL valuation

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January 15, 2013 – Comments (9) | RELATED TICKERS: AAPL

I like to keep an eye on AAPL valuation.

Right now at a price of $489/share the company's market cap is $472 billion.  Let's do a back of the envelope Peter Lynch style quickie on it.  P/E at this price, TTM is roughly 11.3.

Now let's back out AAPL's cash pile of $130 billion (cash and very non-volatile marketable securities.)  There is no debt. That gets us to a company with an adjusted market cap of $342 billion, or a cash-adjusted P/E of 8.  I like to knock off a point of P/E for every percent of dividend yield for comparison purposes, so we're trading closer to a for-comparison-purposes P/E of 7 today.  (The comparison is to a similar company with no cash pile, no debt and no dividend, and there are plenty of those out there, including the average S+P stock, trading at a P/E of 15.)

The historical P/E of AAPL valued by this method is closer to 12, so the market is saying AAPL is a value trap and earnings should decrease 40% short-term.  I get that - sure, it's a possibility - but do you believe it?  Do you believe that AAPL is now among the worst stocks trading in the S+P 500 index?

Well, if so, don't buy any AAPL at this price.  Otherwise take advantage of Mr Market's bipolar swing and back up your truck. 

9 Comments – Post Your Own

#1) On January 15, 2013 at 11:20 AM, thunderboltnova (< 20) wrote:

I'm concerned Apple is still riding on Steve Jobs coat tails. Apple did poorly when Steve wasn't with the company. All the products you see from them today, were invented or introduced by Steve Jobs.

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#2) On January 15, 2013 at 11:21 AM, JohnCLeven (76.80) wrote:

Solid analysis. This is a great, quick way to understand Mr.Market's future expectations of a company.

AAPL's outside my circle of competence, so i'll toss it aside, but this type of thinking is applicable to any company.

Thanks for the post!

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#3) On January 15, 2013 at 11:27 AM, kenwallstreet (< 20) wrote:

Good points. The only caveat is that anytime you use comps as a basis of valuation you run into a problem of moving targets; ie. even though historically the pe has been x, that is predicated on profit margins being y;  and if y changes is x still a valid benchmark, etc? 

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#4) On January 15, 2013 at 12:16 PM, Mega (99.95) wrote:

I agree Apple is way too cheap. However, I would caution against assuming it will reach a fair valuation (20x trailing PE would be fair right now in my opinion). Their gigantic market cap is not an advantage in the stock market.

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#5) On January 15, 2013 at 12:38 PM, Morgana (< 20) wrote:

Steve Jobs is dead.  But do you actually believe that he did not prepare his company with product developement for at least a few years to come?  Do you actually believe he did everything by himself?  If so, don't buy.

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#6) On January 15, 2013 at 2:57 PM, miteycasey (30.33) wrote:

They've reduced the demand for iphone 5 parts by 50%.

I think that's why APPL has taken a haircut today.

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#7) On January 15, 2013 at 8:52 PM, ikkyu2 (99.26) wrote:

"Steve Jobs' coat tails"

"All the products you see"

"demand for iPhone 5"

"why

Right, so none of that stuff has anything to do with what I'm talking about, which is a very quick way of valuing a company that has positive cash flow, positive sales, positive earnings, no debt, and a dividend.  It doesn't matter what line of work that company is in, what sector, what widget it makes, what future demand is - and, by the way, if you think you can forecast demand for a flavor-of-the-month tech product 6 months down the road, you need some nuts with your ice cream.

Point being, we are talking about valuation, which doesn't require you to know about the underlying business.  That's not saying the underlying business doesn't matter; it just doesn't matter when you are trying to say is the stock cheap or is it expensive relative to other companies that trade.

MegaShort makes a good point, though, that when you are looking at an entry price you ought to be thinking about your exit scenarios too.  Priced just for AAPL's TTM earnings growth, a comparable mid-cap company would be selling for $1100 per share.   AAPL may reach that - but more likely not, because where is the $500 billion in investor capital going to magically materialize from?

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#8) On January 15, 2013 at 11:23 PM, awallejr (85.55) wrote:

Personally I don't think Apple is a broken company or even a broken stock.  Long term I expect the shares to rise not fall.  I do, however, think its growth rate has stalled and may be heading the way of "value" vs "growth."

High price in the US or Europe might work, but not in emerging countries.  Some kid in China had to sell a kidney to buy an Iphone and Ipad.  That's a fact and not a good one for Apple.

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#9) On January 16, 2013 at 4:17 PM, Tagit (56.87) wrote:

If it ever passes $700 + again I'll be shocked.

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