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Sunday, February 22, 2015 4:23:45 AM
Apple Shares Could Return 25% in a Year
Apple’s earnings are expected to jump 32% this year, to $8.53 a share—and earnings are surely understated.
By Jack Hough
February 21, 2015
Apple ’s success with bigger iPhone screens has helped expand its stock valuation. The shares have climbed to $129 from a split-adjusted $76 since we recommended them nearly a year ago (“For Apple, Bigger Is Surely Better,” March 24, 2014). They now go for 14.8 times projected earnings for the next four quarters, up from 12 times.
The last time Apple (ticker: AAPL) hit a major peak, at about $100 in September 2012, its shares had a slightly lower price-to-earnings ratio than now, and a more diversified business mix, with iPhones making up barely half of sales, versus closer to two-thirds now. The shares went on to tumble 40% in less than a year. Might Apple now be topping out again?
Unlikely. Look for the stock price to rise to $160 over the next year for a 25% return including dividends. Expect a big dividend hike when the company updates its capital-return program, likely in April. The current yield looks undersized at 1.5%.
Put product speculation aside for the moment, and consider a few things about the stock valuation. First, Apple sits on cash and investments worth $30 a share, up from $18 a share back in September 2012. Net of this cash, the shares are cheaper than they appear.
Second, Apple’s earnings are unusually clean. Management doesn’t point investors toward a spiffed-up measure of earnings that excludes things like the cost of issuing stock to employees, as many big tech firms do. The $8.53 a share that Wall Street predicts Apple will earn in its current fiscal year, through September, is calculated under generally accepted accounting principles, or GAAP. Contrast that with, say, Facebook, which is expected to report adjusted earnings of $1.96 a share this year, but GAAP earnings of only 96 cents. Or Google, projected to earn an adjusted $28.71 a share, but $23.11 under GAAP. Apples to apples, you know who shines.
Third, Apple’s free-cash generation—what matters in the long run for paying dividends, buying back shares, and investing in new gadgets and services—easily exceeds its earnings. Only part of the difference is explained by stock compensation reducing earnings but not free cash. Apple whips through merchandise so quickly that it enjoys what’s called a negative cash-conversion cycle, meaning it collects money from customers faster than it pays suppliers. That’s rare. Wall Street expects Apple’s free cash flow to total $10.17 a share this fiscal year, or 19% more than its earnings.
Put it all together and Apple trades at an enterprise value—a measure that adjusts the stock market value for debt and cash holdings—of 10.1 times projected free cash flow for calendar 2015. That puts it on par with Hewlett-Packard (HPQ), and makes it 11% cheaper than Microsoft (MSFT). Companies like General Mills (GIS) and Procter & Gamble (PG), which investors flock to precisely for the ability to turn out steady cash, carry enterprise values closer to 25 times free cash flow.
That raises the question of whether Apple can continue to grow after the runaway success of the iPhone 6. It already enjoys about a 20% market share in smartphone units—and more than a 90% share in smartphone profits, in part because its average selling prices are more than double the industry average. That would seem to set Apple up for impossible comparisons starting around this Christmas, when it will lap the first full quarter of iPhone 6 sales. And yet, earnings estimates for more distant quarters have been rising. For example, Wall Street now predicts that Apple will earn $2.28 a share in the quarter a year from now, ending in March 2016. Five months ago, the estimate for that quarter was under $2.
ONE REASON THAT DISTANT estimates are pushing higher may be gathering confidence that the iPhone has more upside. Only 15% or so of the user base has upgraded to the 6 so far. If history repeats, Apple will launch a 6s model in the fall with a similar design and improved specs and software. Confidence may also be rising in the forthcoming Apple Watch, which bulls say could add 10% to fiscal-2016 revenue (“The Apple Watch Could Bring In $23 Billion Next Year,” Tech Trader, Feb. 16). If the watch is a hit, Apple Pay could be, too. Piper Jaffray Apple analyst Gene Munster thinks that Apple will launch a new Apple TV set-top box this fall with gaming and home-automation capabilities and perhaps bundled content to compete with cable. That could pave the way for a television. And Apple is reportedly gearing up to produce a car by 2020.
None of these alone will send the stock soaring. For example, an Apple car might sound exciting, but even adding Ford’s market value to Apple’s would lift shares just 9%—and Apple is surely not going to become Ford anytime soon. But together, the products and rumors suggest that the Appleverse is still expanding, as Apple finds new pain-in-the-neck activities it can make sleeker and easier with a combination of hardware and software.
As the numbers stand now, Wall Street forecasts a 32% earnings-per-share jump this fiscal year on the strength of the iPhone 6, followed by 7% and 6% increases in the two following years. A rise to $160 in a year would put the shares at 17 times forward earnings estimates, where the Standard & Poor’s 500 index trades today. Considering Apple’s understated earnings, its cash hoard, its avenues for growth, and its history of beating expectations, it’s time for the stock to carry at least a market valuation, if not a premium.
E-mail: editors@barrons.com
Apple’s earnings are expected to jump 32% this year, to $8.53 a share—and earnings are surely understated.
By Jack Hough
February 21, 2015
Apple ’s success with bigger iPhone screens has helped expand its stock valuation. The shares have climbed to $129 from a split-adjusted $76 since we recommended them nearly a year ago (“For Apple, Bigger Is Surely Better,” March 24, 2014). They now go for 14.8 times projected earnings for the next four quarters, up from 12 times.
The last time Apple (ticker: AAPL) hit a major peak, at about $100 in September 2012, its shares had a slightly lower price-to-earnings ratio than now, and a more diversified business mix, with iPhones making up barely half of sales, versus closer to two-thirds now. The shares went on to tumble 40% in less than a year. Might Apple now be topping out again?
Unlikely. Look for the stock price to rise to $160 over the next year for a 25% return including dividends. Expect a big dividend hike when the company updates its capital-return program, likely in April. The current yield looks undersized at 1.5%.
Put product speculation aside for the moment, and consider a few things about the stock valuation. First, Apple sits on cash and investments worth $30 a share, up from $18 a share back in September 2012. Net of this cash, the shares are cheaper than they appear.
Second, Apple’s earnings are unusually clean. Management doesn’t point investors toward a spiffed-up measure of earnings that excludes things like the cost of issuing stock to employees, as many big tech firms do. The $8.53 a share that Wall Street predicts Apple will earn in its current fiscal year, through September, is calculated under generally accepted accounting principles, or GAAP. Contrast that with, say, Facebook, which is expected to report adjusted earnings of $1.96 a share this year, but GAAP earnings of only 96 cents. Or Google, projected to earn an adjusted $28.71 a share, but $23.11 under GAAP. Apples to apples, you know who shines.
Third, Apple’s free-cash generation—what matters in the long run for paying dividends, buying back shares, and investing in new gadgets and services—easily exceeds its earnings. Only part of the difference is explained by stock compensation reducing earnings but not free cash. Apple whips through merchandise so quickly that it enjoys what’s called a negative cash-conversion cycle, meaning it collects money from customers faster than it pays suppliers. That’s rare. Wall Street expects Apple’s free cash flow to total $10.17 a share this fiscal year, or 19% more than its earnings.
Put it all together and Apple trades at an enterprise value—a measure that adjusts the stock market value for debt and cash holdings—of 10.1 times projected free cash flow for calendar 2015. That puts it on par with Hewlett-Packard (HPQ), and makes it 11% cheaper than Microsoft (MSFT). Companies like General Mills (GIS) and Procter & Gamble (PG), which investors flock to precisely for the ability to turn out steady cash, carry enterprise values closer to 25 times free cash flow.
That raises the question of whether Apple can continue to grow after the runaway success of the iPhone 6. It already enjoys about a 20% market share in smartphone units—and more than a 90% share in smartphone profits, in part because its average selling prices are more than double the industry average. That would seem to set Apple up for impossible comparisons starting around this Christmas, when it will lap the first full quarter of iPhone 6 sales. And yet, earnings estimates for more distant quarters have been rising. For example, Wall Street now predicts that Apple will earn $2.28 a share in the quarter a year from now, ending in March 2016. Five months ago, the estimate for that quarter was under $2.
ONE REASON THAT DISTANT estimates are pushing higher may be gathering confidence that the iPhone has more upside. Only 15% or so of the user base has upgraded to the 6 so far. If history repeats, Apple will launch a 6s model in the fall with a similar design and improved specs and software. Confidence may also be rising in the forthcoming Apple Watch, which bulls say could add 10% to fiscal-2016 revenue (“The Apple Watch Could Bring In $23 Billion Next Year,” Tech Trader, Feb. 16). If the watch is a hit, Apple Pay could be, too. Piper Jaffray Apple analyst Gene Munster thinks that Apple will launch a new Apple TV set-top box this fall with gaming and home-automation capabilities and perhaps bundled content to compete with cable. That could pave the way for a television. And Apple is reportedly gearing up to produce a car by 2020.
None of these alone will send the stock soaring. For example, an Apple car might sound exciting, but even adding Ford’s market value to Apple’s would lift shares just 9%—and Apple is surely not going to become Ford anytime soon. But together, the products and rumors suggest that the Appleverse is still expanding, as Apple finds new pain-in-the-neck activities it can make sleeker and easier with a combination of hardware and software.
As the numbers stand now, Wall Street forecasts a 32% earnings-per-share jump this fiscal year on the strength of the iPhone 6, followed by 7% and 6% increases in the two following years. A rise to $160 in a year would put the shares at 17 times forward earnings estimates, where the Standard & Poor’s 500 index trades today. Considering Apple’s understated earnings, its cash hoard, its avenues for growth, and its history of beating expectations, it’s time for the stock to carry at least a market valuation, if not a premium.
E-mail: editors@barrons.com
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