24 Mar 2012 12:02
By Teh Hooi Ling
Senior correspondent
The new iPad attests to Apple’s innovativeness. At 22x 2011 profits, it’s far from being priced for perfection
A GROUP of us decided to catch up in the new year for lunch. That was on Feb 22. To round off the lunch, the host decided to go round the table asking each one of us to pick what we think would be the best-performing market and the best-performing stock for the new year.
The winner will have to buy lunch the next time we meet. The assumption is that he or she would have acted on their conviction, and would have made money out of that trade.
There were four of us at the lunch, and each one of us listed our picks. I can’t really remember what each of us selected. But one prediction stood out because of its boldness, and the specific target given.
It’s the host’s prediction. He had stuck his neck out with the forecast that Apple, the maker of iPhones and iPads, would hit US$800 by year-end. On Feb 22, the stock was trading at US$513. Between mid-December 2011 and Feb 22, 2012, the stock had soared by 38 per cent.
As you could imagine, his target price wowed us. Well, what do you know, between then and now, Apple has put on another 17 per cent.
As of today, Apple is the biggest company in the world in terms of market capitalisation. It is worth US$559 billion. That’s more than the GDP of Switzerland in 2010, which according to the International Monetary Fund is the 19th richest country in the world.
Apple has overtaken Exxon Mobil as the most valuable company in the world. The oil and gas company is worth US$402 billion.
Billion-dollar question
At another lunch last week, another friend asked how high Apple shares can go.
Indeed, that has become a billion-dollar question. There are various views out there. On one side is the “No, Apple is not over-valued” camp. And on another is the “Short Apple” camp.
In the latest issue of The Economist, in an article entitled “An iPopping Phenomenon”, the magazine noted that when Cisco, a technology giant, was briefly worth more than US$500 billion in 2000, its price-earnings ratio was above 100; Apple trades at only 22 times its 2011 profits. Its new dividend yield will be almost as generous as that of the overall market. “Even if its shares turn out to be overvalued, this would be more like a pimple than a bubble,” it concluded.
There are other arguments for the bulls’ case. Apple has low penetration in the personal-computer and smartphone markets. Emerging markets like Brazil and China are fertile ground for its products.
While there are concerns over Apple’s innovativeness after the death of Steve Jobs, the launch of the latest iPad has calmed nerves somewhat. Meanwhile, Apple is also gearing up to enter new arenas like television and mobile payments.
US$100 billion cash-pile
Apple now has US$100 billion cash, which can be used to invest in new products and buy out competitors. Even after it starts distributing dividends in the fourth quarter of its financial year 2012 – its first in 17 years – and spending some amount on share buybacks, it would still end the year with more cash than it started. It generated free cash flow, ie, net cash flow after deducting capital expenditures, of US$16 billion in the quarter ended Dec 31, 2011. In the four quarters prior, the free cash flow was US$33 billion.
In terms of stockmarket dynamics, the company’s announcement this week that it would start distributing dividends, opens it up to investments by income-focused funds.
Despite the hyperbolic trajectory of its share price, the company is still trading at 22 times its 2011 earnings. Relative to its forecast earnings for next year, it is trading at 12 times, data from Bloomberg showed.
On the other hand, there is no lack of concern over the sustainability of Apple’s ascent.
Yes, Apple has been delivering spectacular growth quarter after quarter. The average annual growth of its revenue in the last nine quarters is a whopping 67 per cent. Net profit grew at an even higher 84 per cent.
The bigger its earnings base, the more difficult it will be for it to keep up that kind of growth rate. And if its stock is priced for perfection, then any earnings miss could have a big effect on its share price.
Other market commentators pointed out technical issues like Apple’s rapid rise from US$380 to US$600 hasn’t allowed it time to gain true investor support for that US$220 gain. The speed and distance has made both investor-sellers and traders slow to provide the natural support levels that can prevent a share fall-off from occurring.
Yet another reason: it has hit a nice big round number, and this could be a psychological resistance level that induces profit-taking. This coincides with quadruple-witch options expiration. Also, the stock is significantly overbought. Big money will likely be rebalancing in the next two weeks as quarter-end approaches, given that the stock has risen by almost 50 per cent this quarter.
No doubt, fund movements will affect Apple’s stock price. But there is also no denying the strong fundamentals of the company as of now. Its new iPad, which was released on March 16, is the most popular version of the tablet yet. The company sold three million of them in just four days.
The company will likely see continued strong growth in both top and bottom line, at least for this financial year. The world is not quite jaded with Apple yet. At 22 times historical PE, and 12 times next year’s PE, the stock is far from being priced for perfection.
Going by the momentum, it seems like the stock still has room to go upwards. And if Apple could maintain its earnings per share (EPS) of US$14.03 achieved in the last quarter for the next three quarters, then its full-year EPS would come to US$56.12. That’s a doubling from last year’s EPS.
At that kind of EPS, a stock price of US$800 would translate into an earnings multiple of 14.3 times. Not excessive at all, if Apple can continue to keep the cool quotient of its products high up there. For now, there is no indication of the world cooling towards i-Whatever. Hence it may not be a good idea to bet against it. - BT
The writer is a CFA charterholder
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