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.
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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 "Forever 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.