Apple: For Value Investors?

05/09/2014 7:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

We see this maker of smartphones (iPhones), tablets (iPads), computers (Macs), and media players (iPods) as a long-term value investment, explains J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

In its latest quarter, Apple (AAPL) reported excellent results, increased the dividend, and will split the stock 7-for-1 on June 9. Sales for the quarter ended March 31, 2014 increased 5% compared to an increase of 6% in the previous quarter.

EPS surged 15% compared to 5% in the previous quarter. AAPL increased the quarterly dividend by 9% to $3.29, which will increase the yield to 2.3%.

Lastly, management announced that Apple has acquired a total of 24 companies during the past 18 months. Most of the companies are small, less than $1 billion, but the technology acquired through the purchases could become meaningful.

After four straight quarters of declining earnings, Apple reported accelerating EPS growth during the two most recent quarters. Strong iPhone sales bolstered sales and earnings in the quarter ended March 31, 2014.

Of particular note, iPhone sales in China reached $10 billion, as a result of the recent distribution agreement with China Mobile. Sales and EPS will receive another boost later this year from the expected launch of the iPhone 6 in late summer.

This is a huge opportunity for Apple, which will gain market share and participate in the world’s largest marketplace.

Sales of iPhones have increased rapidly during the past couple of years and now account for more than half of revenues. Future iPhone growth will emanate from international and education markets, and from new technology, including the new iPhone 5s and the iPhone 5c.

Demand for tablet computers is rising quickly and Apple remains the leading maker despite stiff competition from Samsung and other Android-based manufacturers.

Sales of Apple’s computers are declining and now make up only 13% of revenues because users are switching to tablet computers. Further declines are likely in 2014 and beyond.

However, robust sales of the new iPad Air and iPad Mini will help Apple to maintain its lead in this fast-growing market. Updated iMac and MacBook computers will also bolster results.

At 13.0 times current EPS, AAPL shares are undervalued. The balance sheet is very strong, with low debt and $45 per share in cash. I expect AAPL to increase to its $790.81 minimum sell price target (pre-split price) within two years.

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