by Jeff Reeves | July 11, 2012 11:27 am
Another analyst is kicking off coverage of Apple (NASDAQ:AAPL), this time at UBS (NYSE:UBS) today. The $740 12-month price target for the tech stock and a “buy” rating is the latest vote of confidence for Apple.
I know, I know — more nonsense about Apple price targets. These things are the hype machine of tech analysts and frequently are just silly figures to get attention.
A now-defunct firm called Ticonderoga had a $666 price target on Apple back in 2011 from “analyst” Brian White. While it might not be too far off these days, this “mark of the beast” clearly was a gimmick.
Then in April, we got our first four-figure target — a flashy $1,001 — when that same hack Brian White apparently found a new gig at Topeka Capital Markets.
It was enough to make Josh Brown, the pithy blogger behind TheReformedBroker.com, to write in a post that he was setting his own target of $2,275.
“I got there by looking at a telephone keypad and taking the digits from the A, A, P and L of the ticker symbol,” he wrote. “Clever, huh?”
So what about the UBS coverage — can we put any stock in it, or is it just the latest round of shenanigans from headline-hungry “experts” in the tech sector?
Actually, this time I think the target isn’t bad — as long as you consider it a 12-to-24-month target, of course. $740 is only 23% upside from here, after all, and I think that’s very doable. But it will take at least a year and possibly two to get there.
The good news is, of course, that Apple will start paying dividends in July, so you’ll get a nice 2.7% yield.
Read between the lines of the actual write-up on Apple from Steve Milunovich:
“Given Apple’s revenue growth of 66% in 2011 and mid-thirties operating margin, it would not be surprising to us if the stock carried a P/E of 15-20x. Instead, Apple sells at 12.4x our C2012 estimate and 11x our C2013 forecast. Excluding $115 in cash per share, the P/Es contract by two points to about 10x and 9x. With a current ROIC of 36% and decent growth prospects given that Apple has only 9% of total handset units and dominates the nascent tablet market, this valuation appears quite conservative.”
For starters, he’s expecting the market to start chasing higher P/E ratios. That indeed happens in bull markets — but hardly seems likely in difficult times. So we have to wait for a broader market recovery for the forward earnings to really spark investment as traders look for growth instead of defensive investments. I personally believe in a recovery — but not until 2013, maybe even 2014.
So be patient if you’re expecting price-to-earnings ratios of 15 to 20 to be the norm.
Secondly, Milunovich is talking about the “nascent” tablet market and the prospect for future growth. The iPhone is a huge hit five years after launch, but it’s important to note that growth took time. Apple managed to turn out more sales in fiscal 2011 (more than 70 million) than in the first four years of the iPhone’s existence! The iPad is going to need more time to find that kind of demand and widespread adoption.
Not a lot of time … but another year-and-a-half should do.
Throw in the dividends and buybacks — and the $28.5 billion in short-term cash and $81.6 billion in long-term investments — and you have a bulletproof stock that can weather any setbacks in the short term.
I personally own Apple, so this could be me just viewing the company with rose-colored glasses. However I, too, bought with the hopes of a strong long-term performance — in part because I plan on holding AAPL for the dividends.
We all know the “smart money” can often be pretty stupid. But in this case, I don’t think UBS and Milunovich are actively trying to make fools of themselves with this Apple call just for attention.
I happen to think $740 is doable — by 2014.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves owned a position in AAPL.
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