Seeking A Holiday Bargain? Try Apple

12/5/2011


  Recent Price
$373
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
13
  Shares (millions)
940
  Long-Term Debts as % of Capital
0%
  52-Week Price Range
$426.70 - $310.50

Apple ($373; AAPL) shares look cheap from nearly every angle. At 13.5 times trailing earnings, Apple hasn't been this inexpensive in at least a decade. The shares are trading 48% below their five-year average P/E ratio. Shares also trade below five-year averages for price/sales (17% discount), enterprise ratio (34%), price/operating cash flow (62%), and price/book value (29%).

Apple's attractive valuation is remarkable considering its shares have nearly doubled over the last two years. But the stock has become listless in the past month, slumping 13% from its all-time high in October and lagging the S&P 500 Index.

Proposed reasons for the slump abound, including Apple's rare earnings miss in the September quarter, Thailand floods crimping supply channels, and new challengers in the tablet-computer market. Apple's weakness could also hint at a changing perception among investors, who may believe Apple's best days of innovation are over.

We remain confident in Apple's growth story and recommend that investors scoop up its shares on the cheap. Apple is a Focus List Buy and a Long-Term Buy.

Still a growth story

Apple continues to churn out electronic devices beloved by millions. First-day orders for the iPhone 4S exceeded the iPhone 4's initial release by 67%, topping 1 million units. The phone's Siri speech-recognition software has become a particularly popular feature.

Long known for its consumer appeal, the company said more than 90% of Fortune 500 companies are testing or distributing iPads and iPhones for workers. Apple tops Research In Motion's ($17; RIMM) BlackBerry as the preferred smartphone for mobile workers, according to a survey conducted in late September and October by iPass Mobile Workforce. Among mobile workers, Apple has a 45% market share, up from 31% a year earlier and exceeding BlackBerry's 32%.

Apple seeks to bolster brand loyalty by streamlining a digital ecosystem among its products. Owners of Apple devices can synchronize media files to their various iPhones, iPads, and Macintosh computers. And for $25 per year, users can remotely access songs from their iTunes library.

All these factors should sustain Apple's operating momentum. The company has grown sales more than 30% in 10 straight quarters, and cash from operations rose 47% or more in each of the last eight quarters.

Apple, notoriously tight with its money, holds more than $81 billion in net cash and marketable securities, or nearly $87 per share. New CEO Tim Cook says Apple will remain prudent with its cash but doesn't feel pressure to hoard it. "I'm religious about a lot of things but not that one," he said in October, leaving open the possibility of a dividend or share-buyback program.

In fiscal 2012 ending September, Wall Street sees Apple delivering 25% higher per-share earnings. Yet Apple shares trade at less than 11 times year-ahead earnings, an 18% discount to the average for its peer group. An annual report for Apple Inc. is available at 1 Infinite Loop, MS 301-4IR, Cupertino, CA 95014; (408) 974-3123;
www.apple.com.

APPLE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '11
7.05
vs.
4.64
+ 39%
422.86
-
334.20
17 - 13
Jun '11
7.79
vs.
3.51
+ 82%
355.13
-
310.50
17 - 15
Mar '11
6.40
vs.
3.33
+ 83%
364.90
-
324.84
20 - 18
Dec '10
6.43
vs.
3.67
+ 71%
326.66
-
277.77
22 - 18
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
108.25
15.15
0.00
422.86
-
277.77
28 - 18
2009
65.23
6.29
0.00
294.73
-
180.70
47 - 29
2008
42.91
5.36
0.00
188.90
-
78.20
35 - 15
2007
32.48
3.93
0.00
202.96
-
100.59
52 - 26
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
100
99
75
100
96
76
72

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


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