Is Apple the Best Value in Technology?

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

Great businesses that are valued like a weak one offer investors who act the opportunity to reap fantastic returns as share prices return to fair value. The recent dramatic decline in the share price of Apple (NASDAQ: AAPL) appears to provide just such an opportunity today.

The competition

Yahoo! Finance lists Google (NASDAQ: GOOG), Hewlett-Packard (NYSE: HPQ), and BlackBerry (NASDAQ: BBRY) as the main competitors to Apple. Ironically, Yahoo! Finance rarely lists these companies as each others' competitors. This provides investors with solid evidence that Apple is a major force across several different aspects of the information technology revolution.

Two of these businesses seem to pose little threat to Apple; but the third is a titan in the new age of digital communications and marketing. It is also a powerful brand name. Assessing a fair value to a stock price entails comparing its current valuation to both its strong and weak competitors.

Apple versus Google

The most formidable of the listed competitors to Apple is Internet giant Googlewith its massive presence in the market for search engine and email applications. Google is also working diligently to expand its presence in the mobile device market.

In a comparison of projected earnings growth over the next five years, Google and Apple are expected to achieve annual rates of 15.7% per year and 14.3% per year, respectively. Even though the five-year earnings growth projections are similar, Google trades at a price equal to 23.24 times estimated 2013 earnings; yet, Apple's 2013 P/E is only 10.82. 

Google also is currently valued at approximately 17.5 times free cash flow, while Apple only carries a valuation of 7.28 times cash flow.

Apple is currently trading at about half the valuation of Google based on several common metrics. Does it really make sense for two of the top technology brands in the world to trade at such disparate prices?

Is Apple only worth the same as its weakest competitors?

One of the early participants in the mobile device market was Research In Motion, which later became BlackBerry Limited. At one time, its products were runaway successes and seemed to be everywhere. Those days have faded into a distant memory, and its market share and its profitability and forward prospects have plummeted.

At this time, BlackBerry is projected to lose $0.58 per share for the year ending February 2014 and $1.01 per share for the year ending February 2015. In contrast, the consensus earnings projections for Apple are $39.29 per share for the fiscal year ending September 2013 and $43.75 per share for the year ending in September 2014.

Apple’s net margins of 21.2% have more than doubled those of BlackBerry over the past five years. It is hard to imagine any rational under which an investor could prefer owning BlackBerry stock over that of Apple.

Apple is better even in its worst market segment

I disagree with the sentiment that the PC is dead. I do agree, however, that the demand is falling. Hewlett-Packard is one of Apple’s largest competitors in what might be the weakest segment of the technology arena.

As demand for personal computers continues to decline, Hewlett-Packard faces the additional challenge of having a commodity product that lacks the “cool” factor of the Mac. Hewlett finds itself positioned with a primary product offering no distinctive advantage over competitors in a shrinking market.

Hewlett’s stock produces a dividend yield of only 2.15% compared to Apple’s 2.59% yield and the business carries a debt-to-equity ratio of 0.84. Apple currently has no debt but plans to take on some in order to return about $100 billion to shareholders over the next 4 years.

Looking forward, the consensus estimated annual earnings growth rate for Hewlett-Packard over the next five years is an almost imperceptible 0.8% per year. Yet the stock currently trades at 7.08 times projected 2013 earnings. It is hard to understand how Hewlett-Packard can be valued at almost seven times its projected earnings growth rate, when Apple is valued about 30% below its projected rate of growth.

Final thoughts

When it comes to BlackBerry and Hewlett-Packard, Apple appears to offer dramatically superior opportunity for investors due to its broader range of products and exceptional financial condition. It is simply hard to imagine any objective assessment where a serious decision can be made to allocate capital to either of these businesses in preference to Apple.

Google offers an exceptional future growth opportunity that is even slightly better than that projected for Apple. However, when consideration is given to the current discrepancy in the valuations of the two businesses, it is hard to make the case that investors are better served owning Google’s stock rather than Apple’s. Google’s current valuation is not unreasonably high; but Apple’s is ridiculously low. It is time to back up the truck on Apple.

Ken McGaha owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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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