Apple Is Valued like an Oil Company

Calla is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Comparing different companies’ price to earnings ratios is usually only useful within industries. Some industries are cyclical, some industries are carried by a few growth stories, and some see most profits from unevenly spaced long term investments. The technology industry is known for sky high P/E's, while the cyclical mining and industrial manufacturing industries are known for single digit P/E's. To put Apple’s (NASDAQ: AAPL) current valuation in perspective, I compare it with industrial stocks carrying similar valuations. Apple’s post-earnings drop brought its P/E to just below 10 and its price-to-book ratio to 3.5, making it so cheap by technology sector standards that it is now comparable to the oil or manufacturing sectors.

ExxonMobil (NYSE: XOM) is Apple’s equivalent in the oil industry, but recently the companies’ financials look awfully similar to each other, despite quite different products and business structures. The two are the biggest companies in the world, and ExxonMobil took Apple’s crown as the largest just last week. At 9.6, ExxonMobil is only a few points below Apple’s P/E of 10. Lest fluctuations distort the price-to-earnings metric, ExxonMobil’s 2.5 price-to-book ratio is also comparable to Apple’s 3.5, and its 6.9 price-to-cash-flow is also slightly better than Apple’s 9. Both companies pay similar dividends, with Apple handing over 2.3% and ExxonMobil 2.5% at current share prices. Oil prices gave ExxonMobil’s investors a disappointing 2012, but unlike Apple, doubts about this year’s earnings do not extend to the company’s long-term prospects. But by the metrics, both companies are cheap blue chips.

Caterpillar (NYSE: CAT) is another huge industrial blue chip with valuations similar to those of Apple. Caterpillar just reported a 55% fall in profits from a year ago and its valuations, like Apple’s, reflect ample uncertainty about the company’s future profitability. However, Caterpillar’s 11.6 P/E and 3.6 price-to-book come in slightly higher than Apple’s, though its price-to-cash-flow is lower at 6.9. Furthermore, Caterpillar appears to be better at retaining shareholder value than Apple: in the past six months, Caterpillar's share price increased 20%, while Apple's dove 25%.

General Motors (NYSE: GM) has had nearly the opposite trajectory of Apple: while Apple was churning out blockbuster quarters and revolutionizing its sector, General Motors was filing for bankruptcy and taking a publicly-funded bail out. General Motors has taken off, rising 43% in the last six months; Apple has fallen 25% in the same period. While moving in opposite directions price-wise, the companies’ valuations are pretty similar: General Motors has a 10.5 P/E but much lower price-to-book and price-to-cash-flow ratios, at 1.5 and 4.8, respectively. Also, General Motors has still not reinstated a dividend.

After several as-expected quarters, Apple is priced well below technology sector standards. Google trades at a P/E of 23, while Facebook stands at 58 – and neither pay dividends. Even Microsoft has higher metrics than Apple, with a P/E of 15 and a tangible book value of 4.2. Apple’s valuations have fallen far enough that Apple’s financial ratios are more in line with industrial blue chips than with other technology stocks. Do you think Apple has earned its new peers? Is the technology sector as a whole overvalued? Or is Apple effectively on sale?


CallaMarie owns shares of Apple. The Motley Fool recommends Apple and General Motors. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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