Apple: Innovation, Value, and Beats

07/07/2014 8:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

With constant new products, global growth, and improving sales and earnings, the iPhone maker remains undervalued according to J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

Apple (AAPL) has performed very well lately, although the percentage move is not exorbitant. The stock split 7-for-1 on June 9, which could provide a slight boost for shareholders.

However, I think the big boost will come when the company launches its iPhone 6 in early September.

The new phone will have a lot more new (and important) features than recent upgrades. After reporting lackluster results in 2013, it appears sales and earnings will accelerate during the next couple of years.

In September 2013, Apple signed a significant contract with Japanese network provider NTT Docomo (DCM), which will offer the new iPhone 5s and 5c to its 60 million customers.

More recently, Apple signed a multi-year agreement to provide the iPhone 5s and 5c via the network of China Mobile (CHL), which has more than 760 million customers.

iPhones were made available at Apple and China Mobile retail stores in China in January. iPhone sales in China reached $10 billion in the March quarter.

Apple will buy privately owned Beats Electronics, which makes high-end headphones and has a promising music streaming service.

The $3.2 billion price tag will be the largest acquisition in Apple's history. The acquisition is expensive, but Beats is very creative and will add a spark to Apple's quest to become more innovative.

Sales likely increased 3% but EPS (earnings per share) declined 3% during the past 12 months ended March 31, 2014. Earnings were adversely affected by component shortages and lower profit margins.

Sales and earnings should improve going forward, though. Sales for the 12 months ending March 31, 2015 will climb 12% and EPS will advance 14% to 46.38. At 13.6 times my forward EPS estimate, AAPL shares are undervalued.

The balance sheet is very strong with low debt and $45 per share in cash. The recently increased dividend now yields 2.0%. I recommend buying AAPL at the current price; our minimum sell price target for the stock is $124.32 per share.

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