AAPL-the cup is half full

A fairly positive analysis. Good points.

****Soldier of Fortune. Reading Alpha


Over the last six months, Apple (AAPL) shares have declined over 30%. The pullback has cost the company nearly a third of its market capitalization, with all its shareholders suffering alongside.

(click to enlarge)

Nevertheless, I am optimistic about the company’s prospects over the long run. Evaluating the stock from a variety of standpoints, each points to the same conclusion- a significantly undervalued company and an attractive investment opportunity. In the next few paragraphs, I’ll walk through each viewpoint in more detail.

Absolute Valuation

Estimating a company’s intrinsic value is always an important aspect of a fundamental analysis. Here, I will perform three separate calculations to get an estimate of what AAPL might be worth, based on projected growth rates over the next 5 years. However, should Apple manage to create another hit product in the interim, these projections will likely prove to be overly conservative. If possible, I always like to use a blend of projections to lessen the effect of excessive optimism or pessimism by any individual party.

Model assumptions:

-a WACC of 10.8%, a standard figure for companies that rely solely on equity to finance their operations.

-Earnings Growth (taken from blend of Value Line/FactSet/Thomson Reuters estimates): 16%

-Sales Growth (Value Line/FactSet/Thomson Reuters): 15%

-Cash Flow Growth (Value Line/Thomson Reuters): 20%

– for conservatism, P/E, P/S, and P/CF numbers used are the midpoint of their current value and AAPL’s 5-year average

*EPS, sales per share, and cash flow per share numbers taken from AAPL’s historical data


Earnings Growth Valuation: $759.56

Sales Growth Valuation: $503.96

Cash Flow Growth Valuation: $683.37

Average of the three: $648.96

Implied Upside from Current Levels: 50.8%

Relative Valuation

Once one has ascertained that Apple is undervalued on an absolute basis, it can also be helpful to determine the attractiveness of the company on a comparative basis. After all, if the entire industry is undervalued another company might make an even better investment; or, if the company is trading above its historic multiples, perhaps one can get a better entry point by waiting.

AAPL 5-Year Average Relative to Industry
P/E 9.7 22.4 0.7
P/S 2.5 4.2 1.7
P/CF 7.2 14.1 0.8
EV/EBITDA 6.2 13.7 0.8

As the table indicates, AAPL currently trades below its historical averages in all the major categories, and, aside from its P/S value, at discount to the rest of its industry peers.

Thus, it appears Apple is substantially undervalued on both an absolute and relative basis no matter which metric you prefer to use. Given the company’s strong financial position and widespread customer loyalty, as well as the probability of a shareholder yield increase in the near future, the stock has limited downside risk and an imminent catalyst. At current levels, opening a new position or adding to a preexisting one seems like a decision likely to pay off handsomely in the future if one is willing to weather the current storm in the short term. Those willing to stomach a bit of extra volatility can also consider purchasing an ATM or slightly OTM 2015 LEAPS option to further leverage their upside.

airly positive analysis. Good points.



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s