Believe It or Not, Apple Stock Is Undervalued

Advertisement

Apple (NASDAQ:AAPL) is the second-most highly valued company in the country — behind ExxonMobil (NYSE:XOM). But it still has further to rise.

If its stock goes up another 12% and ExxonMobil’s value remains unchanged, Apple could surpass the oil giant in market value.

What’s great about Apple is what makes its stock scary for some — Steve Jobs. After all, he is responsible for inventing the iPod, iTunes, iPhone and iPad, which have propelled Apple’s phenomenal growth. But he is not in great physical shape, and it’s difficult to imagine another human being who could replace him. The question for investors is how long Apple could stay on an earnings roll if Jobs was no longer involved with Apple.

Here are four reasons to consider the stock:

  • Great earnings report. Apple posted strong Q2 earnings driven by strong iPhone 4 and iPad 2 sales with revenue of $28.6 billion — 13% above analysts’ estimates — and pro-forma EPS of $7.79 — beating analysts’ expectations by 36%. This was thanks to better-than-expected sales of iPhones (20.3 million units vs. Canaccord Genuity Technology’s 16.8 million estimate) and iPads (9.3 million vs. 7.9 million estimate).
  • Cheap stock. Apple’s price-to-earnings-to-growth ratio of 0.89 (where a PEG of 1.0 is considered fairly priced) means its stock is cheap. Apple has a P/E of 15.4 and is expected to grow 17.4% to $31.69 in 2012. And that growth forecast is much slower than the 2011 forecast of 78% growth — so odds are good that Apple stock is a bargain.
  • Out-earned its capital cost. Apple is earning more than its cost of capital — and it’s improving at a phenomenally high rate. How so? It produced positive EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Apple’s EVA momentum was 17%, based on first nine months’ 2010 annualized revenue of $59.8 billion, and EVA that improved from $7.3 billion annualizing the first nine months of 2010 to $17.4 billion annualizing the first nine months of 2011, using a 10% weighted average cost of capital.
  • Rapid growth with pristine balance sheet. Apple has been growing fast, with high profit margins. Its $65 billion in revenues have climbed at an average rate of 35.6% over the past five years, and its net income of $14 billion has gone up at an even faster average rate of 62.7% during the period — representing a 22% net margin. It has no debt, and its cash grew at a 26% annual rate, from $10.1 billion (2006) to $25.6 billion (2010).

This stock has further to rise — but unless there is someone better than Steve Jobs out there to continue innovating Apple’s way to success, the stock is going to top out. The problem is figuring out when that might happen and setting a stop loss so you can get out fast if you need to.

Peter Cohan has no financial interest in the securities mentioned.

(Editor’s Note: A previous version of this story incorrectly quoted the market capitalization of Apple in 1999.  The reference was removed to prevent confusion)


Article printed from InvestorPlace Media, https://investorplace.com/2011/08/apple-stock-aapl-value/.

©2024 InvestorPlace Media, LLC