AAPL Stock Is a Bargain Buy
By Dan Burrows
Apple (AAPL) is a screaming buy for 2014, and not because of anything it’s going to do on the product front. Rather, Apple stock is a must-have for buy-and-hold investors because the valuation on AAPL is too tempting to pass up.
First, let’s subtract the $45 in cash per share that AAPL boasts, because we’re paying for future earnings, not the war chest Apple has amassed. That makes the forward price-to-earnings multiple (P/E) on AAPL stock 10.8. (With the cash, it’s 11.8.)
By either measure, AAPL stock is a screaming buy because over time, valuation reverts to the mean. Over the last five years, Apple stock has an average forward P/E of 16, according to data from Thomson Reuters Stock Reports. By that measure, AAPL stock is on sale by more than 30%, including the war chest or not.
Valuation looks even more favorable on a trailing earnings basis. APPL stock has trailing P/E of 14, which represents a 26% discount to its own five-year average.
With cash or not, by both forward and trailing P/E, Apple stock is on sale.
AAPL is even more compelling when compared to the broader market. At 16 times forward earnings, the S&P 500 looks a lot pricier than Apple stock. That’s especially true when you consider that AAPL has much stronger profit potential. The S&P 500 has a long-term growth forecast of 9.7%. That makes the price/earnings-to-growth multiple 1.85. Meanwhile, at 14.3%, AAPL has a much higher long-term growth forecast, but fetches less than 11 times forward earnings — again, excluding all that cash. That makes the PEG on Apple stock 1.32.
Put it together and Apple is a whopping 40% cheaper than the broader market. That can’t last. At some point, the sentiment on Apple stock will turn more positive, the multiple will expand, and shares will rise even more.