Three Reasons To Bite Into Apple

10/21/2013


  Recent Price
$499
  Dividend
$12.20
  Yield
2.4%
  P/E Ratio
12
  Shares (millions)
924
  Long-Term Debt as % of Capital
12%
  52-Week Price Range
$652.79 - $385.10

Shares of Apple ($499; AAPL) have rallied 29% above the June low of less than $390. Credit the recovery to June-quarter earnings that topped estimates, as well as excitement about new iPhones.

However, recent performance hasn't dimmed investors' memories of the stock's decline from highs above $700 per share in September 2012, or a summer marred by fears of a slowdown in the smartphone market and questions about Apple's ability to stay ahead of the competition.   

In our view, Apple offers an impressive mix of product momentum, appealing value relative to its growth, and increasingly shareholder-friendly policies that should drive market-beating returns over the next year. With that in mind, here are three reasons to snack on Apple, a Buy and a Long-Term Buy.

It's all about the products

Rumors always swirl around Apple, the latest being an Oct. 22 event to introduce the next-generation iPad tablet computer. The new device — reportedly thinner, with fingerprint technology and an improved display — should keep sales rising.

Apple launched two new iPhones — the high-end 5S model and the somewhat cheaper 5C — last month. A record 9 million of the devices sold in the first three days on the market. In September, the 5S accounted for 64% of Apple's smartphone sales, versus just 27% for the 5C. Apple is reportedly cutting orders for the 5C in the fourth quarter while boosting orders for the 5S. The company seems to have cleared up shortages of the high-end model. According to published reports, iPhones could become available to China Mobile's ($55; CHL) 740 million subscribers next month.

Of course, Apple does more than iPads and iPhones. iTunes radio, launched in the U.S. in September, will reportedly reach other English-speaking countries next year. And some analysts expect a more advanced Apple TV product in the coming months.

Growth at a good price

The consensus projects per-share profits will rise 10% in the year ending September 2014, a target that has risen over the last month. Comparing Apple's valuation of 11.5 times expected fiscal 2014 earnings to its expected annual profit growth of 15% over the next five years yields a PEG (price/earnings-to-growth) ratio of 0.9, below the industry median of 1.3. At 12 times trailing earnings, Apple trades 26% below its own five-year average P/E ratio. 

Buybacks and dividends

Apple, on pace to pay out more than $10 billion in dividends over the next year, yields 2.4%. The company has pledged to pay out $100 billion in dividends and buybacks by the end of 2015, a commitment it can easily meet given $146.6 billion ($159 per share) in cash and investments and free cash flow of $32.9 billion ($36 per share) over the last year.

After announcing a $60 billion buyback plan in April, the largest in history, the company set a record for buybacks in a single quarter ($15.9 billion in the June quarter).

You can obtain an annual report for Apple Inc. at 1 Infinite Loop, Cupertino, CA 95014, (408) 996-1010, investor.apple.com.

APPLE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '13
7.47
vs.
9.32
1%
465.75
-
385.10
11 - 9
Mar '13
10.09
vs.
12.30
11%
555.00
-
419.00
13 - 10
Dec '12
13.81
vs.
13.97
18%
676.75
-
501.23
15 - 11
Sep '12
8.67
vs.
7.05
27%
705.07
-
570.00
17 - 13
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
156.51
44.15
2.65
705.07
-
354.24
16 - 8
2011
108.25
27.68
0.00
422.86
-
277.77
15 - 10
2010
65.23
15.15
0.00
294.73
-
180.70
19 - 12
2009
42.91
9.08
0.00
188.90
-
78.20
21 - 9
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
48
94
99
96
97
52

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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