Apple: A Value Stock

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

Lately we have seen a lot of speculation as to "what is wrong" with Apple (NASDAQ: AAPL). Obviously something is wrong with Apple's stock considering it has fallen from over $700 down to around $460. The issue with the stock is the type of investor who would want to own shares at this point. Apple is transforming from one of the most loved growth stocks to a loathed value stock, and therein lies the opportunity for long-term investors.

One thing people often forget to mention is that Apple yields 2.4% while only trading at 9.1x forward earnings. At 8.7x forward earnings you can buy Microsoft, who can barely get their toe wet in the mobile phone market, is seeing PC sales plummet due to tablets, and has to deal with a little company called Google who is giving away a cloud version of Microsoft Office. Google, who is currently the only real competitor in terms of a mobile OS, trades at 14.4x forward earnings with no dividend. For 9.1x forward earnings you are buying Apple, which is one of the greatest retailers in the world, with $6,050 in sales per square foot. The closest retailer is Tiffany at $3,017 per square foot.

Challenges on the horizon

Apple is not without challenges. Unlike the United States, much of the rest of the world's telecommunications companies do not subsidize their phones. That means that the iPhone 5 starts at $649 not $199. This also means that many consumers are going to either choose cheaper Android phones or earlier iterations of the iPhone, which will hurt margins. Considering this, as well as the competition from companies like Samsung with their Galaxy S III in the high-end smartphone market, the 5 year projected growth rate of Apple at just under 19% may be too high. The recent pullback in stock price has already more than compensated for a deceleration in the growth rate. If Apple's projected 19% growth rate gets cut in half, Apple's PEG ratio would still only be about 1.1. Google trades with a PEG of 1.26 and Microsoft trades with a PEG of 1.17.

It's not like Apple is the next BlackBerry. Apple has almost $40 billion in cash and continues to generate lots of cash quarter after quarter. On top of that, Apple's production of the iPad, iMac, and iPhone cannot keep up with demand according to Tim Cook on Apple's most recent conference call:

"We did have significant shortages due to robust demand on both iPad mini and both models of the iMac that persisted the entire quarter. And we are still short of both of those today as the matter of fact. Additionally, supply of iPhone 5 was short to demand until late in the quarter and iPhone 4 was short for the entire quarter, we believe that we can achieve a supply demand balance on iPad mini during this quarter and on iPhone 4 during this quarter. On iMac, we are confident that we are going to significantly increase the supply, but the demand here is very strong and we are not certain that we will achieve a supply demand balance during the quarter."

The bottom line

Right now Apple is a great buy for the long-term. I would not be surprised if Apple went down a bit more, but the downside is limited and it has a lot of room to run from here. If you are starting a position I would consider buying a third of your position here. If Apple does continue to decline do to cuts in its projected growth rate you can buy more on the way down.


Justinboucher has no position in any stocks mentioned. The Motley Fool recommends Apple. 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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