3 Ways Apple Can Reward Investors in 2013
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Apple (NASDAQ: AAPL) has lost over $180 worth of its share price over the last three months - a 26.6% decline - but there are plenty of reasons for Cupertino bulls to consider buying on the dip. We've covered these catalysts individually before, but it's important to note what some of the tech world's top analysts are saying as well.
Gene Munster, of Piper Jaffray, has been very outspoken about Apple lately, calling for a TV to be introduced next fall, while maintaining a $900 price target on the stock. On CNBC earlier last week, Munster introduced three concepts that he believes can boost shares of the tech company in 2013.
1) "An increased dividend in April."
Regarding this point, there's no argument that Apple has the cash to increase its dividend yield. With an estimated $120 billion in cash, some estimates call for this balance to double, perhaps even reaching $300 billion by 2015.
Now, it appears that Apple will not use some of this liquidity to pay a special dividend to help shareholders fight a likely rise in taxes on capital gains and dividends (see Will Apple Pay a Special Dividend?), so Munster's prediction is logically valid. What remains to be seen, however, is if Apple performs any major acquisitions next year.
According to Barron's, Apple's payout ratio is "20% of projected earnings," which is far below the likes of Microsoft (NASDAQ: MSFT) (32%) and Cisco Systems (NASDAQ: CSCO) (29%). At a projected yield of 2.0% - below Microsoft (3.3%) and Cisco (2.8%) - it's very possible that Apple will want to reward its shareholders at a higher rate next year.
Now, it's worth mentioning that Apple's yield is still above International Business Machines (NYSE: IBM) (1.75%) and Google (NASDAQ: GOOG), which does not pay a dividend, so there is some justification if this prediction falls through.
2) "China Mobile, which has about 500 million subs that should be a catalyst for iPhone growth in the back half [of 2013]."
A China Mobile deal may be the best growth catalyst for Apple. In case you were unaware, the company is currently in talks with the mobile subscriber, which has over a half-billion subscribers, to potentially sell the iPhone. Apple released the latest iteration of its smartphone via carriers China Telecom and China Unicom earlier this month, but the combination of both companies' user bases (about 330 million) still pales in comparison to that of China Mobile.
While most would argue that the prospects of both sides reaching a deal rely on technical implications, the simple fact is that China Mobile is unwilling to sign an agreement that does not give them at least some portion of Apple's sales. Most sources cite this desired revenue stream to be exclusively from iTunes. What we do know is that China Mobile's CEO, Li Yue, has been quoted as saying “the business model and benefit sharing still need further discussion.”
IDC analyst Teck-Zhung Wong (via Bloomberg) has said “Li’s comment suggests that China Mobile has no intention of simply gifting Apple access to its huge subscriber base without extracting a pound of flesh from Apple.”
What remains to be seen, then, is if both sides can come to a deal (as Gene Munster predicts), which iPhone model will be sold by the carrier. We're already hearing rumors of an iPhone 5S and even a low-cost model that could hit the shelves by next year or 2014, so we can surmise that Apple's iPhone 5 will be in the agreement only if a deal is done in the next six months or so.
You can probably guess what Munster's final concept is.
3) "Apple Television."
This may be the Apple prediction that Munster is most famous for, as he's mentioned many times that he expects an Apple TV to be announced sometime next year, with a release sometime around November 2013.
Originally reported by Business Insider, this line of thinking was mentioned in the analyst's "product roadmap," which mentioned: "November 2013: An Apple TV comes out. It should cost $1,500-$2,000 and come in sizes from 42-inches to 55-inches."
Using these price figures, a report from Morgan Stanley using data from an AlphaWise consumer survey estimates that Apple could see TV-related U.S. revenues of $13 billion if the company made an entry into the living room next year. From an earnings standpoint, this would increase EPS by $4.50, giving next year's consensus ($48.78) upside of 9%-10%.
Keep in mind that these estimates are limited to the U.S. specifically; the report indicates that a worldwide release of an Apple TV over the longer term can "multiply those estimates by four," via StreetInsider.
So, what can investors do at the moment?
Fortunately, even if none of these forward-looking growth catalysts materialize, Apple is still a very attractive investment at its current levels. Shares sport a mere forward earnings multiple of 9.0x, and trade at a severely depressed PEG ratio of 0.6. Regarding the PEG, this figure is based off of the sell-side's growth estimates, which expect annual EPS growth to average 19.6% a year over the next half-decade.
By comparison, the Street expects Google (15.7%), IBM (9.9%), Microsoft (9.6%), and Cisco (9.4%) to grow their bottom lines at a much slower rate, which explains why each trades at an elevated earnings growth multiple. At 1.4, Google's PEG is more than double that of Apple's, and IBM (1.4), Microsoft (1.5), and Cisco (1.4) are as well.
If Apple is able to achieve even one of the three growth drivers set forth by Munster that we've discussed above, it's likely that shares of the tech giant can be catapulted back toward a fairer valuation. With the possibility that all three scenarios could be in play by this time next year, it's not a stretch to consider the Piper Jaffray analyst's $900 price target as a reasonable expectation.
This article is written by Jake Mann and edited by Meena Krishnamsetty. Meena has long positions in AAPL, GOOG, and MSFT. The Motley Fool owns shares of Apple, Google, International Business Machines, and Microsoft. Motley Fool newsletter services recommend Apple, Cisco Systems, Google, International Business Machines, and Microsoft. 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!