Has Apple's Stock (Finally) Peaked?

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During the past 12 years, Wal-Mart (NYSE: WMT ) , Microsoft (Nasdaq: MSFT ) , Cisco (Nasdaq: CSCO ) and other giants have seen their sales and profits rise by 150% --or more. Yet you would have been wise to sell these stocks before the growth took place. 

That's because their stock prices are actually lower than they were a dozen years ago. These stocks once had very high price-to-earnings (P/E) ratios, and those multiples have compressed even faster than earnings have grown.

These days, many investors are wondering if the same fate will befall Apple (Nasdaq: AAPL ) . The company's market value punched through $300 billion in early 2011 and then made a mad dash for $600 billion this past April. But since then, billions in market value have been bled away.

Are we really ready to close the books on one of the greatest investments of the past decade? 

Probably not. 

Although it's unclear if Apple will someday reach the $1,000 per share price target that some have suggested, it is increasingly clear that many supports are in place to get this stock moving higher once again (short of a growling bear market ). 

Simply put, Apple is a lot more attractively valued in relation to its current and future growth prospects when compared to the likes of Microsoft, Wal-Mart and Cisco back in 2000. And today, there's no tech bubble in place.

So why should investors expect more upside? To understand that, you have to slice and dice the numbers, starting with Apple's stunning balance sheet

Companies would kill for a balance sheet like this...
Every time someone buys another one of Apple's high-margin products, the company's cash balance rises a bit more. Consider this stat: Apple's cash balance grew nearly as quickly from fiscal (Sept.) 2010 to fiscal 2011 as it had in all of its years up until fiscal 2009...

 

In just the first six months of fiscal 2012, cash has grown ANOTHER $29 billion to $110 billion, putting it on track to exceed $130 billion by the end of this fiscal year . Back out that projected cash, and Apple is valued closer to $400 billion than the current $530 billion.

If shares of Apple managed to fall further in the face of tough market conditions over the next few years, management would likely look to implement a stunning share buyback that would help underpin per share profits. For example, a $55 billion share buyback would absorb 96 million shares, immediately cutting the share count by 10%.

More to the point, Apple still looks quite reasonable in the context of the company's earnings strength. In the first six months of fiscal 2012, Apple has earned almost $25 billion in net income and is likely to top $50 billion for the full-year. (Analysts are currently modeling for profits to drop in the last two quarters of fiscal 2012, which is something of a joke, considering Apple has blown past estimates in each of the past two quarters). So this stock is valued at around eight times the current run rate of earnings ($400 billion/$50 billion). 

It's probably safe to assume Apple's multiple won't climb much higher. Even so, a fresh look at the company's product roadmap implies that investors can count on further profit gains to help deliver a rising stock price.

Apple's final chapter isn't written yet... 
Apple is on the cusp of an imminent upgrade for the iPhone, and more importantly, is expected to make a major splash in television later this year, offering up the world's first truly interactive TV set that, of course, will be another platform to buy the company's various software offerings.

Perhaps of greater import, Apple is just now making a major push in to a number of emerging markets . These are markets characterized by fast-growing middle classes that are starting to embrace Apple's hardware and software offerings. Analysts at Credit Suisse think emerging markets could add $90 billion in sales and $21 in earnings per share ( EPS ) to Apple's income statement by 2015.

Right now, analysts expect Apple to boost EPS around 15% in fiscal 2013 to around $54, which on the face of it, is the kind of share price appreciation you should expect if the earnings multiple stays constant. Then again, Apple has managed to earn more than analysts had anticipated when the fiscal year began for each of the past six years. 

Of course, Apple will eventually find it harder to keep growing at a 15% to 20% clip, but that is unlikely to materialize in the next few years. After all, this is a company that consistently boosts profit margins (rising from 22% in fiscal 2008 to 31% in fiscal 2011). Some have expected Apple's margin gains to cool off, yet the company keeps expanding that ratio. 

One day, perhaps by the middle of the decade, sales growth will cool and margins will stop expanding. Even so, this technology powerhouse will be mightily profitable for many years to come.

Risks to Consider: It's hard to think about any considerable risks with this stock. It's got a ton of cash, a reasonable valuation, and a product line that's still going strong. That said, if Apple falls on its face with its new offerings, and history shows that's highly unlikely, then there could be trouble. And even still, there's that mountain of cash that could be used to support the stock.

Action to Take --> If you've owned shares of Apple all the way up, there's no need to panic after the recent pullback. But whether you own shares now or plan on buying them, you should temper your expectations for future gains because Apple is now so big that it is subject to the law of large numbers

Shares are likely to re-visit the $625 level seen this past spring, once the market's current spate of choppiness has passed. That said, if this stock continues its northward trajectory and makes a mad dash for the $700 mark in short order, then investors may be wise to finally start parting with this stunningly-good investment.

[ Note: I'm so convinced Apple is one of the safest stocks you could own while still earning solid returns that I'll go out on a limb here... It may just be what StreetAuthority Co-Founder Paul Tracy calls a &quotForever Stock". These are stocks that consistently trounce the competition, have large piles of cash, and are very good to shareholders. In fact, they consistently beat the market so often, that you could practically hold them "forever." Paul has all the details in a special presentation called " The 10 Best Stocks to Hold Forever ."


-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of MFST, CSCO in one or more if its "real money" portfolios.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas

Referenced Stocks: AAPL , CSCO , EPS , WMT

David Sterman

David Sterman

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