Is Apple In A League Of Its Own?

By Keith Speights - April 25, 2012 | Tickers: AAPL, CF, CMI, KBR, SLW | 0 Comments

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There they go again. Apple (NASDAQ: AAPL) blew away all expectations in its earnings release on April 24th. Mr. Roget doesn’t have enough superlative adjectives in his thesaurus to adequately describe the powerhouse that Apple is. If you had to pick one and only one company to buy, you would be hard pressed to come up with a better one than Forrest Gump’s fruit company. Conventional wisdom is that Apple is in a league of its own. But is the conventional wisdom right?

Defining The League Ground Rules

Let’s first define Apple’s league. There are many attributes that Apple possesses that make it shine. Earnings per share (EPS) growth is one of the most important. EPS growth is the engine behind successful stocks. Stocks in Apples league would have EPS growth or 50% or more annually.

I would argue that a strong return on equity (ROE) should be high on our list also. A company that isn’t hitting a 20% or higher ROE level doesn’t belong in the same tier as Apple. We also want excellent profits. Let’s boot out anyone who can’t at least make a double-digit profit margin.

Don't forget valuation. Despite its parabolic upward price movement, Apple still has room to go up even more. How about setting our league forward price-to-earnings benchmark at 20? That should be a good level to weed out the strong stocks that could be just a little too expensive for the Apple league. Along the same lines, I recommend that we factor growth into our valuation metrics and use a PEG ratio maximum of 1.0, the rule of thumb level of a fairly priced company.

There are two other hurdles we should make our contestants jump. One relates to debt. Apple has none. We probably don’t have to be quite so strict as to require zero debt, but let’s say we only consider companies with a debt-to-capital of 25% or lower. Also, we really couldn’t include small cap stocks in the same league as Apple. Five billion seems like a reasonable market cap threshold.

Contenders

If we use our league ground rules to scour the entire investing universe, there are only three other companies that are serious contenders. The three potential Apple leaguers are: CF Industries (NYSE: CF), Cummins (NYSE: CMI) and Silver Wheaton (NYSE: SLW). Let’s see how they compare to the league standard bearer.

These stocks represent the cream of the crop. They all are strong companies with great valuations. The key differentiator among the companies can’t be found in the numerical results, though. When we buy a stock, we’re buying into a business. And some businesses have more potential and more risk than others.

Take CF Industries, for example. It is in the fertilizer business. There should be strong demand for fertilizer throughout 2012. However, CF relies on use of nitrogen. Nitrogen prices have experienced quite a bit of volatility recently and could impact how well CF stock performs through the rest of the year.

Cummins makes truck engines and power generation equipment. It’s a leader in both areas and should continue to experience strong growth barring any major worldwide economic slowdowns. Cummins appears to be firing on all cylinders.

Silver Wheaton is a silver mining and streaming company, operating across the globe. Its fortunes correlate with the price of silver, which has gone down 16% over the past couple of months. Silver is likely to rebound, though. If it does, Silver Wheaton stock will enjoy a nice up trend as well.

In The League

Back to our initial question. Is Apple in a league of its own? Certainly, using the parameters that we defined all of the companies mentioned deserve to be in the same league as Apple. I wouldn’t be reluctant to put my own money into any of these companies.

However, as solid as these three contenders are they’re just not Apple. They’re all more dependent upon uncontrollable factors than Apple is - CF with nitrogen prices, Cummins with demand in the far corners of the earth, Silver Wheaton with silver prices. Apple, on the other hand, acts in large part as the master of its own universe.

People don’t sleep outside feed stores to buy CF-made fertilizer, truck dealerships to buy Cummins-made engines or jewelry stores to buy bracelets made from silver mined by Silver Wheaton. Wait until iPhone 5 comes out. Cities across the world will have campers outside Apple stores. And who knows what the Cupertino creators have waiting in the wings?

There are some excellent companies out there. There are some excellent stocks out there. There are some legitimate contenders for your investment dollar out there. But for now at least, Apple is in a league of its own.

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