Apple Valuation

iras1 on

You may be. Our SSG projects 10% growth (probably a lot less than AAPL will achieve), uses the average of the lowest 5 of 10 PE ratios (rather than the average of the last 5), and TTM EPS of 35.11. We have a buy up to slightly more than $600.

How do you arrive at a hold?

Ira Smilovitz

In a message dated 3/6/2012 11:24:34 A.M. Eastern Standard Time, ejmoosa@yahoo.com writes:

I find it interesting to see Apple being held by more clubs
this week than last week. My SSG shows it to be deep into
the "hold" range. Am I alone in this valuation?

Ernest Moosa on

I have a p/e of 21 using an earnings estimate of $50 in five
years, which is slightly higher than your earnings growth
rate. During the years 2007-2011 the P/E has been trending
downward.

Even as their earnings have accelerated, the P/E has been
contracting. What will drive it to a higher P/E in the
future, especially since everyone that has wanted to own
Apple probably already has it?

I've attached a PDF of my SSG. Feel free to critique it.

Attachment:Apple.pdf

Roy Chastain on

Ernest, Thank you for sending your SSG. I'll do my best to respond; maybe other people will have different views. My comments are below.

Roy Chastain

"Little by little, I am learning the art of being quite content with doing very little slowly."
Lionel Hardcastle in "As Time Goes By"

--- On Wed, 3/7/12, Ernest Moosa <ejmoosa@yahoo.com> wrote:

I've attached a PDF of my SSG. Feel free to critique it.

First, you are using old data. (FY2011 Q4). That helps to set up your earlier comment that the present price was "deep into the 'hold' range."

Also, I don't know what the older Value Line's projections were, but I'm pretty sure you used a 12.6% growth rate in order to match VL's 3-5 year EPS number. I used FY2012 Q1 data and began my projections from the last quarterly data, not the last annual data. Doing so resulted in a higher EPS number than VL. That occurred even though my growth projection was half of VL's projections. I am OK with that because VL provides a 3-5 year range, while I go out 5 years, and I believe the earnings that are reported since the annual data should be taken into account (either good or bad).

I have a p/e of 21 using an earnings estimate of $50 in five
years, which is slightly higher than your earnings growth
rate. During the years 2007-2011 the P/E has been trending
downward.

I believe the $50 figure you mention is your EPS from Section 1, and isn't based on the P/E ratio, be it 20, 21, or a different number. (Did you use P/E of 21 in order to match VL's high price projection?)

Yes, TK6 shows that the P/E has trended down, and I don't know how to approach that. P/Es are a moving number, not static like indicated in TK6. They vary throughout the year (daily, even). Unfortunately, I don't recall how Section 3's P/Es are calculated. But they are a snapshot, and the P/E moves with the rise and fall of prices and issuance of quarterly reports.

In any event, reviewing the financial information (VL is a good source) I see that the stock price is about 6 times higher than its 2009 low, while the EPS has risen about 5 times from that point. 9Thus, I would except a different trend.) Also, I believe that in August 2011, the P/E was around 14. Today, Yahoo Finance shows P/E @ 15.4, but TK6 shows the current price has a P/E of 19.2. [So, has the P/E remained static since August 2011?]

(Possibly, if my figues of 5x & 6x are off, and the trend truly is downward, is it because the rapid change in Earnings has outpaced the rise in price because of market psychology that can't wrap its mind around Apple's true value and abilities. It certainly isn't because of a selloff, or the price would have fallen.)

Even as their earnings have accelerated, the P/E has been
contracting. What will drive it to a higher P/E in the
future, especially since everyone that has wanted to own
Apple probably already has it?

I don't necessarily agree with your final premise. Even if everyone who wants to buy Apple already has it (which I don't endorse), it ignores that investors will add shares to their portfolios, especially on dips. Further, P/E expansion occurs when the market believes the sales and earnings growth numbers are for real. But even if the P/E has contracted and perhaps will, the stock price will continue to grow if earnings continue to grow, just like the price has during the last few years of P/E contraction. After all, P/E is a ratio and higher earnings will result in higher prices, wjile the ratio remains constant.

For every positive article on Apple, there is a cautionary one. If The Market decides to fully value AAPL, the price will soar and blast through the price projections offered by VL. If not, even with a constant or slightly downward P/E, the stock price will continue to rise, if EPS continue to rise. Of course, the market fluctuates. Think back to September when the iPhone 4S came out, instead of the iPhone 5. The stock price took a hit, but then recovered and soared. That is the way with AAPL (and actually most of my stocks). To me, those are buying opportunities.

I hope this helped, even though I certainly don't have all (or many) of the answers.

Lawrence D Caldwell, Jr. on

Hi Mr. Chastain,

Great analysis. I agree with your premise of AAPL being a stock still headed upwards.

At the end of your post you said, "The stock price took a hit, but then recovered and soared. That is the way with AAPL (and actually most of my stocks). To me, those are buying opportunities."

I am just curious as to which other companies you own or would recommend. I'm looking for a couple of good companies that are in a position where buying on dips is smart.

Thanks,

L. Dale Caldwell

Roy Chastain on

Lawrence, thank you for your kind comments. You asked but I can't recommend any stocks for you to purchase, on dips or otherwise. Some of mine crawl up fairly consistently, while others have fallen pretty hard. There were a few in my portfolio that I either kept or added to last August. They were AAPL, RHT, YUM & SBUX. But, just because I own them doesn't mean you should. Even on the next dip, their fundamentals could have changed making them unattractive even at the lower price. (As an example, I got burned buying more DLB on a dip.) So, . . . .

Roy Chastain

"Little by little, I am learning the art of being quite content with doing very little slowly."
Lionel Hardcastle in "As Time Goes By"

--- On Fri, 3/9/12, Lawrence D Caldwell, Jr. <razorbackndc@gmail.com> wrote:

From: Lawrence D Caldwell, Jr. <razorbackndc@gmail.com>
Subject: [club_cafe] Re: Apple Valuation
To: club_cafe@bivio.com
Date: Friday, March 9, 2012, 11:20 AM

Hi Mr. Chastain,

Great analysis. I agree with your premise of AAPL being a stock still headed upwards.

At the end of your post you said, "The stock price took a hit, but then recovered and soared. That is the way with AAPL (and actually most of my stocks). To me, those are buying opportunities."

I am just curious as to which other companies you own or would recommend. I'm looking for a couple of good companies that are in a position where buying on dips is smart.

Thanks,

L. Dale Caldwell

Ernest Moosa on

Thanks for the thoughtful feedback Roy.

Yes I do use Valueline's earnings estimates and projected
high price as a guiding influence. By doing so, I am
attempting to remove some of my own emotional judgement from
the equation.

I do attempt to affirm or deny that these numbers are
plausible as I do the SSG however.

On the P/E side of the equation, I examine both the high and
low P/Es over the last five years to understand the trend.
I feel that the expansion or contraction directions indicate
changes in psychology of investors and how they feel about
the stock.

On the final premise, I'll pose the following question:
What are the potential new "purchasers" of Apple stock
waiting on? The news has been great, the numbers great, the
outlook great. So what event will need to occur for them to
buy?

Once again, thanks for the effort you put into your reply.
Nice to be at a site where your head is not bitten off for
having an opinion that is somewhat contrarian.

EJ

Roy Chastain on

Ernest, You are very welcome. I agree about the civility here. I learn so much from others, and often that means discussing (challenging?) certain views. The exchange of ideas is how I learn.

There are tons of people sitting on the fence. Why? I recently saw the phrase that AAPL has been "penalized by the law of large numbers." Because the earnings rose faster than price, the "multiple" has contracted. Also, the large price has scared a lot of people. My own club had a couple of members who felt that @ $350 a share was "too expensive," they would buy $10 shares @ $35. (Imagine how $545 would strike them.) Fortunately, on a majority vote, we bought 5 shares and now we look brilliant. ;-)

There also has been a lot of discussion that sitting on such a huge amount of cash is bad for the company. (Huh??) Should AAPL split, or start issuing dividends, watch people jump in!

Finally, there are still doubters that knock Apple and its products whenever possible. These doubts cause fear that like Icarus, Apple soared too high and can't maintain such growth, being knocked out by Google's or Microsoft's products. (Think Nokia and RIM's Blackberry.) While these doubters probably will never buy AAPL, their doubts influence others who might buy. After things stabilize, perhaps the fence sitters will move in - especially if Apple makes positive acts in splitting AAPL or issuing dividends.

p.s. I still rely in large part on Value Line, but I am somewhat troubled in that some of VL's analysts give conflicting information. Thus, I use VL as a guide not a rigid template. But, that is me and I can't fault anyone for relying on VL's figures.

Roy Chastain

"Little by little, I am learning the art of being quite content with doing very little slowly."
Lionel Hardcastle in "As Time Goes By"

--- On Fri, 3/9/12, Ernest Moosa <ejmoosa@yahoo.com> wrote:

Thanks for the thoughtful feedback Roy.

Yes I do use Valueline's earnings estimates and projected
high price as a guiding influence. By doing so, I am
attempting to remove some of my own emotional judgement from
the equation.

I do attempt to affirm or deny that these numbers are
plausible as I do the SSG however.

On the P/E side of the equation, I examine both the high and
low P/Es over the last five years to understand the trend.
I feel that the expansion or contraction directions indicate
changes in psychology of investors and how they feel about
the stock.

On the final premise, I'll pose the following question:
What are the potential new "purchasers" of Apple stock
waiting on? The news has been great, the numbers great, the
outlook great. So what event will need to occur for them to
buy?

Once again, thanks for the effort you put into your reply.
Nice to be at a site where your head is not bitten off for
having an opinion that is somewhat contrarian.

EJ

Rob Nagler on

On Fri, Mar 9, 2012 at 7:14 PM, Roy Chastain wrote:
> There are tons of people sitting on the fence. �Why? �I recently saw the
> phrase that AAPL has been �penalized by the law of large numbers.�

There is something real here. Simon Lack talks about this concept In
The Hedge Fund Mirage, which is a very good book, btw. With hedge
funds, the problem of scale is very real. With product or service
companies, the issue is slightly different.

Apple is very good. I mean Apple is AWESOME. I was in an Apple store
this week in Boulder. The store is less than 10K sq ft, and had 25
blue-shirted staff in it. I can walk in pretty much any time of the
day, and there are more customers than that. And, this is in Boulder,
where the other stores are virtually empty. Apple grosses $14B in its
physical stores. That's $5.6K/sq ft. The closest store to that is
Tiffany at $3K/sq ft. Costco grosses $81B, but only gets $1K/sq ft.
However impressive that is, what's more impressive is that Apple's
physical store sales went up by 50% over the prior year 2010(?).
Here's the chart which was quoted all over the place on 8/24/11:

http://www.macrumors.com/2011/08/24/apple-tops-u-s-retail-chains-in-sales-per-square-foot/

Even if it only did half as good as Tiffany, that would still be
incredible, since most of its revenue is generated elsewhere. In
other words, it is by far the most successful bricks and mortar
retailer in the US, and that's not even its main business model. This
growth has happened in an incredibly bad economy.

> There also has been a lot of discussion

I think that says it all: discussion. People are baffled by Apple's
success. I remember sitting at a table many years ago and saying,
"While Apple is very successful, I have to question the concept that
you think it is going to go up by 10x". It was unthinkable, but
that's exactly "the problem" with Apple: its success has been
completely unimaginable. You can't just sit there and say, "It'll go
up by 10x" today, but there's about a 50% chance you'd be wrong.

It's very important to realize that Apple is not monopoly, like
Microsoft and Google. Indeed, they are just the opposite. They are
just like Tiffany: they sell exclusive items at a huge premium. They
still have a small share of the PC and phone markets. They do have a
60% share of the tablet market, but essentially, Apple created that
market. While Android is growing, Apple is, too, because Apple
reinvented the smart phone market.

> While these
> doubters probably will never buy AAPL, their doubts influence others who
> might buy.

I don't think anybody is affecting Apple's growth except Apple. Even
Steve Jobs' s death didn't put a dent in their growth. If any one
event would affect people's future impressions of Apple, that would be
it, and probably, it increased the growth, because of the two major
books and countless memorials to The Great Man. Despite the fears,
Jobs managed his own exit quite well. As with all Apple news, it was
mixed with selected rumors and announcements. Tim Cook is looking
pretty strong as CEO. This surprised me as much as anything else in
Apple's history. They turned Jobs's death into a marketing coup.

> p.s. �I still rely in large part on Value Line, but I am somewhat troubled
> in that some of VL�s analysts give conflicting information. �Thus, I use

I think VL's analysts are humans, and in fact, bureaucrats. They have
to churn out analyses at too great a rate, and they don't have skin in
the game. Follow the money. Who of the big investors is buying
Apple, and why, or why not? There are some pretty big numbers
attached to pretty big names in this list:

http://finance.yahoo.com/q/mh?s=AAPL+Major+Holders

You won't find me in that list. ;-) I don't own AAPL except
indirectly through SPY. I'm not an active investor except in my own
companies. I just find their success fascinating. I use a lot of
their products so I tend to keep abreast of their "goings on". What
will happen in 10 years is anybody's guess, but I'm pretty sure they
aren't going away in the next 5, and look for a great new innovation
in the new few years.

Cheers,
Rob

Mark Eckman on

Roy,

Ø ...There also has been a lot of discussion that sitting on such a huge amount of cash is bad for the company. (Huh??)

I view the discussion a bit differently. As Warren Buffet says so well, the job of management is to allocate the company resources where needed. So, if they have an adequate reserve for future needs, if they do not see either an expansion of the business assets, or an acquisition, why shouldn't the company distribute that to shareholders? Buffett makes it clear that Berkshire Hathaway may find new opportunities for the cash as investments. The only answer Steve Jobs ever gave for the cash hoard was that this kept Apple strong. The recent discussions are truly a test leadership and a quest to understand the direction Tim Cook will take with the company.

Maybe Al Gore, as a member of the Apple Board of Directors, can invent the Internet again so Apple can invest. ;-)

Mark Eckman

Roy Chastain on

Mark, Thank you. Considering Apple's history of secrecy, I'm not surprised that Jobs wasn't more articulate, or forthcoming. I took it that Apple wanted the padding for strategic acquisitions (Siri, Inc., for example), to buy patents, and to handle court battles. Thus, I'm OK that Apple is hoarding its money, rather than paying dividends. (While AAPL stock has a certain cachet (ala Berkshire) I wouldn't mind a 10 - 1 split. [I know the values are the same, but it has a psychological effect on the fence-sitters.] That ought to put the stock into overdrive (not that a 50% increase this past year hasn't been vvvvery nice).

As for Al, I'll just say he recieved the least amount of "For" votes and highest amount of "Withheld" votes.

Roy Chastain

"Little by little, I am learning the art of being quite content with doing very little slowly."
Lionel Hardcastle in "As Time Goes By"

--- On Sat, 3/10/12, Mark Eckman <mark2459@gmail.com> wrote:

Roy,

Ø ...There also has been a lot of discussion that sitting on such a huge amount of cash is bad for the company. (Huh??)

I view the discussion a bit differently. As Warren Buffet says so well, the job of management is to allocate the company resources where needed. So, if they have an adequate reserve for future needs, if they do not see either an expansion of the business assets, or an acquisition, why shouldn't the company distribute that to shareholders? Buffett makes it clear that Berkshire Hathaway may find new opportunities for the cash as investments. The only answer Steve Jobs ever gave for the cash hoard was that this kept Apple strong. The recent discussions are truly a test leadership and a quest to understand the direction Tim Cook will take with the company.

Maybe Al Gore, as a member of the Apple Board of Directors, can invent the Internet again so Apple can invest. ;-)

Mark Eckman

Roy Chastain on

Rob, Amazing stats and discussion. Thank you. I wasn't aware of the sales/sq. ft @ the Apple Stores. The Apple Store is an interesting concept. Although other brick-and-mortar stores are having troubles, this concept actually seemed to kick start the resurgence in Apple. It is great to go in and ask questions face-to-face, rather than via a telephone. And you get to play with all their toys! And I've had two computers worked on for free @ the Genius Bar (although I accept that this service is built into the sale price).

What is disconcerting is to attend a class right in the middle of the store with other people milling around and gawking. (I was one of those at times, too.) I think they use those classes as marketing opportunities. Seeing a group of 5 or 6 users with an instructor generates more interest and the view: "Apple cares!" But, they seem to, certainly when compared to the now-defunct Circuit City and Comp USA.

Great info. Thank you, Rob.

Roy Chastain

"Little by little, I am learning the art of being quite content with doing very little slowly."
Lionel Hardcastle in "As Time Goes By"

--- On Sat, 3/10/12, Rob Nagler <nagler@bivio.biz> wrote:

Apple is very good. I mean Apple is AWESOME. I was in an Apple store
this week in Boulder. The store is less than 10K sq ft, and had 25
blue-shirted staff in it. I can walk in pretty much any time of the
day, and there are more customers than that. And, this is in Boulder,
where the other stores are virtually empty. Apple grosses $14B in its
physical stores. That's $5.6K/sq ft. The closest store to that is
Tiffany at $3K/sq ft. Costco grosses $81B, but only gets $1K/sq ft.
However impressive that is, what's more impressive is that Apple's
physical store sales went up by 50% over the prior year 2010(?).
Here's the chart which was quoted all over the place on 8/24/11:

http://www.macrumors.com/2011/08/24/apple-tops-u-s-retail-chains-in-sales-per-square-foot/

Even if it only did half as good as Tiffany, that would still be
incredible, since most of its revenue is generated elsewhere. In
other words, it is by far the most successful bricks and mortar
retailer in the US, and that's not even its main business model. This
growth has happened in an incredibly bad economy.

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