Buy Apple on the Dip

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

With a valuation hovering between 11 and 12 times earnings is Apple (NASDAQ: AAPL) cheap? It certainly is relative to peers. All-in-all, Apple is a compelling growth-at-reasonable-price opportunity presented by the market today.

Ignore the Stories

It has become fashionable to turn on Apple as an investment. This turn in media sentiment coincided with a drop in stock price from $705 to $505 between September and November. A diverse set of reasons for Apple’s drop have included Mapplegate, a fear of “heights” (price retracement), and increased competition. Considerable attention has also been focused on its legal battles with some of its competitors.

Are these legitimate short-term concerns? Yes. Mapplegate, for example, has been said to have a measurable impact on sales. However, this is not something that impacts the long-term (more than one year) future earnings of the firm. Even court decisions which have the appearance of being final get overturned and delayed via appeals.

Despite all this noise, the average analyst estimate for earnings growth is 16.5% for the fiscal year ending September 2013. Analysts expect a forward earnings growth of 20.9% for the next five years, on average. Apple has demonstrated that such estimates are reasonable since it posted an average 70.8% earnings growth rate in the past five years. The analyst growth estimates are arguably the most credible estimates for any stock since Apple attracts significant media and analyst attention.

Based on projections for future earnings, Apple is a compelling buy between 11 and 12 times earnings.

Computing Future Valuations from Growth Projections

Investors should buy stocks trading at prices which make them good deals. A poor company trading at a dismal price may be an excellent trade. Apple is a great company trading at remarkably low valuations which make it attractive. Its metrics are provided with peer stocks:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>Earnings Growth Est.</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>Sales Growth Est.</strong></p> </td> </tr> <tr> <td> <p><span class="ticker" data-id="202686">(NASDAQ: <a href="">AAPL</a>)</span></p> </td> <td> <p>Apple</p> </td> <td> <p>12.0</p> </td> <td> <p>20.9%</p> </td> <td> <p>3.2</p> </td> <td> <p>44.8%</p> </td> </tr> <tr> <td> <p><span><span class="ticker" data-id="204577">(NASDAQ: <a href="">MSFT</a>)</span></span></p> </td> <td> <p>Microsoft</p> </td> <td> <p>14.3</p> </td> <td> <p>9.6%</p> </td> <td> <p>3.1</p> </td> <td> <p>7.6%</p> </td> </tr> <tr> <td> <p><span><span class="ticker" data-id="203768">(NASDAQ: <a href="">GOOG</a>)</span></span></p> </td> <td> <p>Google</p> </td> <td> <p>20.3</p> </td> <td> <p>15.7%</p> </td> <td> <p>4.5</p> </td> <td> <p>29.0%</p> </td> </tr> <tr> <td> <p><span><span class="ticker" data-id="204739">(NYSE: <a href="">NOK</a>)</span></span></p> </td> <td> <p>Nokia</p> </td> <td> <p>NA</p> </td> <td> <p>4.2%</p> </td> <td> <p>0.3</p> </td> <td> <p>-1.2%</p> </td> </tr> <tr> <td> <p><span><span class="ticker" data-id="205221">(NASDAQ: <a href="">BBRY</a>)</span></span></p> </td> <td> <p>Research In Motion</p> </td> <td> <p>NA</p> </td> <td> <p>5.0%</p> </td> <td> <p>0.3</p> </td> <td> <p>43.4%</p> </td> </tr> </tbody> </table>

Future valuation multiples of Apple and its peer stocks were modeled by combining expected growth and trailing valuation multiples for sales and earnings. Graphs of future price-to-earnings and price-to-sales ratios based on analyst earnings growth estimates and historical sales growth follows:


<img src="/media/images/user_14628/forward-pe_large.gif" />


<img src="/media/images/user_14628/forward-ps_large.gif" />

These projections illustrate how Apple’s lower valuations and growth trajectory dominate its profitable peers Microsoft and Google. On a price-to-earnings basis Apple is the cheapest stock among its peers and would continue to be if growth trajectories are sustained. Only its peer firms which ran a loss for the last twelve months, Nokia and Research In Motion, are cheaper on a price-to-sales basis.

Analyst estimates for faster-than-economic growth are not predictive after three years or so, investors would need to accept that they are buying Apple for its currently cheap price-to-earnings multiple through a 6.8 multiple of fiscal 2015 projected earnings. Apple would grow into its currently high price-to-sales multiple as sales growth would make it have a 2015 price-to-sales multiple of 1.0. Who would cry about that?

Peers on this list do not fare as well.

The projected crossover dates span well into the distant future for the price-to-earnings multiple, demonstrating how Apple is a bargain relative to its peers.


Since the drop in Apple's share prices, Apple is clearly the best play for smartphones, tablets, and the future of consumer computing.

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