WILL FARLEY:::Seeking Alpha.
In September 2012 Apple (AAPL) could do no wrong. It was the darling of Wall Street as the buy recommendations and $900-$1,000 price targets rained in. Today, investor sentiment for this same stock has done a complete 180. No investor likes to catch a falling knife, but it seems that Apple may be finally emerging from the distaste of Wall Street. If Apple does recover in the coming months, there will be a lot of money to be made, and not only just by buying Apple itself.
A Brief Look at Apple’s Valuation
As you can see, compared to peers of the computer hardware industry Apple may appear fairly valued at its Thursday closing price of 431.76. However, Apple trades much cheaper than the S&P average P/E of 18.42 and it also yields a 2.83% dividend, which is superior to the S&P, average yield of 2.10%. Apple also has some of the best profit margins in its industry, and a very sound balance sheet. With billions in cash overseas, Apple recently decided to issue debt paying only 1.85% interest. This minimal amount of newly issued debt allowed the company to avoid $9.2 billion in corporate taxes.
I’m not going to put a price target on Apple, but I do believe its current levels are too cheap. The company is losing market share in the smartphone market, and bottom line revenues are falling. However, Apple still maintains some of the top profit margins among its peers, and future products should bolster revenues and share price. The company’s product pipeline in the near future appears prepared to boost revenues with a new iOS 7, iTunes Radio, Mac OS X Mavericks, and a wearable device. The management of Apple, led by Tim Cook, has not undergone major changes since its glory days in September. The major shift here is investor sentiment. The stock now only has 56.80% institutional ownership, and when investor sentiment shifts again I believe Apple’s stock price will ascend steadily at a gradual pace.
Preparation For the Ascent
As Apple’s stock price rocketed from $400 to $700 in the earlier months of 2012, there were a few stocks that tagged along for the ride. These stocks known as “derivative stocks”, produced returns similar to or superior to those of Apple. These stocks rely heavily on Apple for a substantial amount of their revenue.
Cirrus Logic (CRUS): Valued with a similar trailing P/E of 9.68, Cirrus Logic once traded at 45.49 on September 9/7/12, around the same time Apple had soared to all time highs. Anticipating a drop in revenue from $207 million to $160 million, the slowdown in demand from Apple has greatly affected Cirrus’ bottom line. It is speculated that a whopping 85% of the company’s revenue comes from Apple. This is the most obvious play on a pickup in Apple’s earnings, and increased demand for the chipmaker’s products as Apple engages in new product cycles.
Skyworks (SWKS): Another company trading on the lower end of their 52 week high/low (19.21-31.44), Skyworks Solutions provides radio components and power amplifier chips to smartphones and tablets. The company trading at 18x past earnings, provided two power amplifying chips in the iPhone 5 in contrast to only one in the iPhone 4. Skyworks’ revenue stream is more diversified than Cirrus however as it supplies components to Android smartphones as well. The board also deemed its company’s shares undervalued as it announced today that it will engage in a $250 million share buyback plan. Skyworks will benefit in the continuation of the smartphone revolution as well as a shift in investor sentiment toward apple and its suppliers.
The decision to buy or sell Apple is highly debated. However, I believe Apple will soon recover, and when it does use a recovery in the Apple suppliers to maximize return.