Apple: Almost Every Investor Is Misunderstanding This Simple Fact

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

Apple (NASDAQ: AAPL) is down close to 9% over the past week, with the majority of those losses occurring in after-hours trading last Wednesday, after the company reported some uninspiring first quarter top-line numbers. Cupertino missed Wall Street's revenue expectations and also issued next-quarter guidance 5-10% below what most analysts are forecasting. Additionally, for those investors subscribing to the philosophy that earnings are a key driver of stock prices, they've likely been disappointed by EPS figures.

At first glance, it appears that Apple's earnings declined year-over-year in Q1, but when we do some simple arithmetic, this is simply not the case. If you'll recall, Insider Monkey informed investors in December (see Many Apple Bears are Forgetting This) that it's incorrect to compare AAPL's Q1 FY2013 period with its Q1 FY2012 period. It's time to update our original analysis.

One year ago, Apple generated a first quarter EPS of $13.87. These earnings were accumulated over a period of 14 weeks.

In this past quarter, which Apple reported last week, the company generated EPS of $13.81. These earnings were accumulated over a period of 13 weeks.

A first grader could tell the difference between these figures, but apparently, this math is too difficult for today's average financial journalist to perform. We're not calling out one platform in particular. No, it appears that almost every armchair analyst misunderstood this simple 7-day difference.

So, to tackle this "complex math," all we have to do is split up Apple's EPS figures into weekly averages.

In Q1 FY2012, Apple generated close to 99 cents in earnings per week over the 14-week period.

In Q1 FY2013, Apple generated $1.06 in earnings per week over the 13-week period.

This means, that despite the headlines mentioning that Apple had "flat" or "slightly lower" EPS this past quarter, we can see that the company actually experienced an adjusted EPS growth of 7 percentage points, year over year.

Is it possible that many Apple investors who sold their shares last week were focusing on the company's revenue numbers?

Yes.

Is it also possible that some Cupertino bears were incorrectly assessing Apple's earnings, thinking that they had fallen flat compared to the previous year's first quarter?

Unfortunately, yes.

So, now the rational question investors must ask themselves is: Does a company that grew weekly earnings last quarter and beat the Street's estimates really deserve to be trading at its current multiples? Let’s take a look.

At its present price near $460 a share, Apple trades at 8.8 times forward earnings and a PEG of 0.74. Obviously, these metrics have been cited by bullish investors quite a bit over the past few months, but we don’t think it’s time to throw out the value-investing mantra just yet.

As famed tech analyst Gene Munster has pointed out many times (see our full analysis on Insider Monkey), it’s probable that investors need a kick-start, so to speak, that can boost shares back to a better valuation. At the moment, Mr. Market is valuing Apple like a Microsoft (NASDAQ: MSFT) or an Intel (NASDAQ: INTC), and the general sentiment is that growth cannot last forever.

If, however, Cupertino can introduce one or more of the following catalysts this year, optimism could once again reign supreme: (1) an Apple TV, (2) a low-cost iPhone tailored to emerging market consumers, (3) an entry into the phablet space, or (4) a smartphone deal with China Mobile. Now, rumors of a smart watch and Google (NASDAQ: GOOG) style glasses catch a fair amount of hype, but we think these four points give the best potential for a pop.

Wall Street analysts expect Apple to experience slowing growth over the next half-decade, estimating 13.8% annual EPS expansion through 2017. This is a far cry from the 62.2% average Apple has sported over the last five years, but it’s worth noting that it still trumps the analyst consensus on Microsoft (8.4%) and Intel (9.4%). Google, meanwhile, is estimated to generate 14-15% EPS growth over this time frame.

At a dividend yield north of 2.3% and a potential to boost this payout in the near future (see Apple Needs to Expand Its ‘Investor Base’), there are still reasons for value and income-seeking investors to add shares of Apple to their portfolios. Obviously, momentum-driven buyers will probably look elsewhere, but it’s crucial to understand—as mentioned above—that last quarter’s growth figures were in the high single-digits and that shares remain cheap by nearly every metric under the sun.

No matter if you’re bullish or bearish, you must have the correct information when considering Apple's prospects moving forward. In today's rough and tumble world of 'write first, ask questions later' journalism, though, it's becoming increasingly difficult to do this.


This article is written by Jake Mann and edited by Meena Krishnamsetty. Meena has long positions in Apple, Google, and Microsoft. The Motley Fool recommends Apple, Google, and Intel. The Motley Fool owns shares of Apple, Google, Intel, 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!

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