The two names, which have been battling for the title of world’s largest public company, are both blue-chip giants without a doubt. Exxon currently holds the title, thanks to Apple’s 40% fall from its September high — a reality that has sliced its market cap dramatically.
Let’s take a look.
A Falling Knife …
When it comes to Apple, given what’s happened to its stock in the past several months, it’s vital that investors first determine whether or not they are catching a falling knife. There’s a big difference between averaging down and buying a stock headed for the basement.
On the one hand, Apple did — as expected — post its first year-over-year decline in quarterly earnings in over a decade on Tuesday. But the report did provide the glimmer of hope needed to assume that the knife has fallen has far as it can for now.
Warren Buffett suggested in early March that Apple ignore David Einhorn’s call to issue dividend-paying preferred shares and instead buy back as much of its stock as it possibly could. And last March I was extremely critical of the company’s meek move to pay a dividend and repurchase its shares.
Yesterday, though, Apple presented a much stronger commitment in both of those areas, which could help the stock price recover despite the earnings decline.
… Or a Great Deal?
Plus, if you believe in the investing mantra that stock prices follow earnings, Apple should be trading somewhere around $4,600. Before you dismiss me as crazy and walk away, let’s look at the facts.
At the end of September 2002, Apple’s net income was $65 million on $5.7 billion in revenue. Ten years later its net income was $41.7 billion on $156.5 billion in revenue.
Yes, net income compounded at an annual growth rate over 90% between 2002 and 2012. And adjusted for splits and dividends, its stock was trading at $7.14 as of the end of September 2002. If you assume that its stock price grows at the same rate, it should have been trading around $4,600 at the end of September 2012.
Instead, it was at $660.22.
Consider Exxon, on the other hand. Its net income has compounded at an annual growth rate of 14.6% over the past decade through the end of 2012. Assuming a similar growth rate, its stock should have been trading around $107.72 at the end of this past year, not $84.56.
The actual growth rate for its stock on an annualized basis was 11.9%, 270 basis points less. But that’s still pretty close.
Even if you use Apple’s CAGR over the last five years of 28%, you get a stock price of $1,803.74. While I’m not suggesting this is its intrinsic value, I think it’s fair to say that investors are heavily discounting its growth — more than almost every other publicly traded company.
To top it off, Exxon on its own does very little to get me excited. Its size is actually a headwind; it’s so big that the only way it can grow is to buy other big E&P firms.
And although XOM pays a decent dividend, its annual total return over the past decade is only slightly better than the S&P 500. Furthermore, it hasn’t had an annual total return of more than 20% since 2007.
If you’re looking for a company that won’t go broke, you’ve come to the right place. But that’s about it.
Apple, on the other hand, still has room — and time — to innovate. Just consider what Larry Dignan, editor-in-chief of ZDNet, said: Apple introduces new products every three years or so, with the iPod in 2001, iTunes in 2003, iPhone in 2007 and the iPad in 2010. This would suggest a new product is due in 2013.
Rumors suggest Apple’s iTV will surface later this year in time for Christmas. While that’s a sensible sentiment, it’s more likely that it will wait to release the product until it feels like it’s got it right. That means its launch could just as easily be delayed well into 2014, but that’s okay because it gives you more time to scoop up its stock at bargain prices.
The bottom line is simple: Of the two companies there’s no question that Apple is a better investment right now than Exxon. No matter how much Apple drops in the coming weeks, it’s still the better stock … and the better company.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.