Will iPhone 5, iPad Mini and Emerging Markets take Apple to $1001 a Share

By Jonathan Yates - August 2, 2012 | Tickers: AMZN, AAPL, BBRY, NOK, S | 0 Comments

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At the iPeak of the Apple (NASDAQ: AAPL) stock surge earlier this year in the spring, Brian White, an analyst with Topeka Capital Markets, released a report predicting that the share price for the producer of iPhones and iPads would hit $1001 within a year. The model for the quadruple figure price level was not outlandish, by any means.  From Mr. White:

"Our 12-month price target of $1,001 for Buy-rated Apple is based on just over 17x our interest expense/income adjusted CY13 pro forma EPS estimate plus net cash per share of $103.66. This equates to a straight P/E of just over 19x our CY13 EPS estimate and is below the mid-20 multiple of 2006-2010. In our view, Apple's valuation does not reflect the growth the Company has been able to deliver in recent years, nor future growth prospects. Between FY04-FY11, Apple grew sales by 44% per annum and increased EPS by 86% per year. Trading at a P/E (ex-cash) of just under 10x our CY13, we believe the stock still has significant upside potential."

While this could still happen, current trends are not auspicous.  Apple would almost have to double from the current price level of under $590, down more than 3% for the week due to disappointing earnings.  But, while Apple's growth figures for the second quarter did not meet the expectations of the analyst community, internal projections were exceeded.  In addition, Apple has several new products widely reported to be coming in the autumn, right before the peak holiday shopping season for consumer electronics.  Augmenting the appeal of Apple stock even more is the reinstatement of a dividend that has an above-average yield.

At present, with a price-to-earnings ratio of 13.76, Apple is trading beneath the average for a member of the Standard & Poor's Index.  There is nothing average about the income statement and balance sheet of Apple.  While the average return-on-equity is about 15%, Apple has one of 44.32%.  A profit margin of 20% is considered to be high.  The profit margin for Apple is 26.97%.  In addition, the earnings-per-share growth of Apple this year is 82.63%, much higher than the five-year average of 64.95%. 

The capital structure of Apple is as impressive as its earnings statement.  There is no debt on the balance sheet.   The coffers are bulging with cash. The price-to-free-cash-flow is 13.13.

What is poignant is that Apple has fallen as Sprint-Nextel (NYSE: S), which has mortgaged its future to iPhone sales, has risen.  Over the last week of market action, Sprint-Nextel is up by 17.76%.  Sprint-Nextel does not make money as it has a negative profit margin of 9.72%.  It treats its investors very poorly with a negative return-on-equity of 26.80%.

Interestingly enough, Sprint-Nextel plunged last autumn as investors were expecting the iPhone 5 and instead the iPhone 4S was introduced.  Even with its recent price surge, Sprint-Nextel is still down for the last 52 weeks of market action due to the pounding it took as a result.  By contrast, Apple is up 49.34% over the same period.

Competitors of Apple with much poorer balance sheets and income statements are also up in recent trading.  Research-in-Motion (NASDAQ: BBRY), which introduced smart phones with the Blackberry, has fallen more than 70% for the past year but is up 8.85% for the last week.  Research-in-Motion has a negative profit margin of 0.30% and a negative return-on-equity of 0.51%.  Nokia Corporation (NYSE: NOK), down more than 60% for the last 52 weeks, jumped more than 20% last week despite having a negative profit margin of 12.55% and a negative return-on-equity of 32.59%.  Amazon (NASDAQ: AMZN), competing with its Kindle products, was also up 3.96% for the last week of market action despite having an anemic profit margin of 0.91% and a limp return-on-equity of just 7.68%.

This trajectory should be re-established with the introduction of the iPhone 5 and the iPad Mini.  No company does a product launch better than Apple.  There were crowd control problems at stores last year for the iPhone 4S.  This should take place again with the iPhone 5 and iPad Mini as each is supposed to be loaded with new, very appealing features.  According to Tieran Ray, writing in Barron's, the iPad Mini is "...widely rumored...to be a smaller, lighter, and cheaper version that could kneecap competing offerings  such as Amazon.com's (AMZN) Kindle Fire, costing $249, and Google's (GOOG) Nexus 7 Tablet, starting at $199."

Greater growth in emerging markets will also come with the iPhone 5 and iPad Mini.  About this, Israel Ganot, the founder of Gazelle, an electronics recycler, notes that, "There is insatiable demand for iPhones outside the U.S., mostly in emerging markets."  The China market is already huge for Apple and an area of concentration for both more sales and more stores.  In addition, consumer spending in China has increased by more than one-third over the last five years.

Amazon is reported to be entering the smart phone market with a Kindle version.  Research-in-Motion has stated that the Blackberry 10 will be hitting stores early next year.  Nokia has a new version of the Windows Phone with Microsoft.  In conjunction with Samsung, Google is rolling out new models.  If Sprint-Nextel switches to any of these competitors from the iPhone, that is a sign that Apple is on the decline.  Do not count on that, however, as the iPhone 5 and iPad Mini will take the share prices for Apple and Sprint-Nextel much higher after being unveiled for consumers around world.

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