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Apple is still a cheap stock
01/25/2012 12:39 pm EST
Should you buy? Well, the stock is still very cheap—especially once you subtract the company’s nearly $100 billion in cash. But you might get a better entry point sometime in the next three months—the March quarter is always weak for Apple. And while that weakness is absolutely predictable, many investors still sell on that worry. The only reason to rush in today is if you think that Apple will do something soon with its cash—like pass out a special dividend—that would send the stock up even further in the short-term.
Earnings for the December quarter of $13.87 a share handily beat Wall Street expectations of $10.07 and the company’s guidance of $9.30. (You might think that the company set guidance so low to make sure that new Apple CEO Tim Cook would be able to report a huge surprise to make up for Apple missing Wall Street projections last quarter, Cook’s first as CEO after the resignation of Steve Jobs. If you think that, I wouldn’t argue with you.) Revenue for the quarter came in at $46.3 billion, well above Wall Street projections for $38.8 billion in revenue.
I can’t find a product segment that disappointed in the quarter. Sales of Macintosh computers grew by 26% year over year—an amazing growth rate given that PC companies such as Microsoft (MSFT) are reporting a 2% to 4% decline in PC sales for the quarter. IPhone sales grew to 37 million units, up 128% year-to-year. (That let Apple pick up share in the smartphone market from Android phones. In December, according to Nielsen, 45% of U.S. shoppers bought an iPhone up from 25% two months earlier. Android phones were purchased by 47% of buyers, down from 62%.) Apple sold 15.4 million iPads, up 111% year to year. (For the first time ever Apple sold more iPads than Hewlett Packard (HWQ), the world’s biggest seller of PCs by units, sold PCs. Hewlett Packard sold 14.7 million PCs in the quarter.)
Apple’s retail division, which had been a worry before the report showed a 59% increase in sales. The iPod business sold 15.4 million units, a 21% drop year to year, but still above Wall Street projections.
Gross margins climbed 4.7 percentage points to 44.7%. Operating margins increased by 8 percentage points. Apple’s cash hoard grew another $16 billion in the quarter of $97.6 billion.
And the March 2012 quarter? Well, it will be weaker than the quarter just finished—Apple typically sees a drop in sales after the holiday season. But Apple did raise its guidance in yesterday’s conference call to $8.50 a share in earnings on revenue of $32.5 billion (32% growth from the March quarter in 2011.)
If you back out the company’s $100 billion in cash, Apple sells at a strikingly low 10 times trailing 12-month earnings per share. That kind of multiple says a significant number of investors are totally skeptical about Apple’s ability to keep up this kind of growth. I understand the skepticism, but I think it’s wrong—at least over the next few years. (And I like this level of skepticism since it means there are lots of skeptics still to convert.) Apple is picking up share in the smartphone market but it still has “only” 20% to 30% share (depending on who’s measuring.) The company is the dominant tablet maker but that market is growing so fast that Apple could lose share and still sell more iPads. And as CEO Cook said in presenting the earnings, there was no evidence that Amazon.com’s (AMZN) new Kindle Fire cut significantly into iPad sales. Apple’s huge and well-organized app store is an under-appreciated competitive advantage. And the company’s new iCloud service looks like it could become another very sticky advantage for Apple. Already 85 million users have signed up to sync their Apple devices through the free service that is just three months old.
I think a $500 target price in 2012 is very reasonable. That’s roughly 11% above today’s price. If that doesn’t meet your definition of a good investment—and with $100 billion in cash and a PE ratio of 10 this is a low risk investment—you can hope for a dip on seasonal weakness that would let you in cheaper (a drop to $425 gives you an 18% return to $500) or figure that Apple will announce a cash dividend that will up the total return from the stock.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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