Apple Inc. (AAPL) has been a very interesting stock ever since the late Steve Jobs returned to the company. Once Apple stock ramped up under Jobs, it has really never looked back as far as growth prospects.
Nobody would ever accuse me of overpaying for a growth stock. I have always been a value investor primarily because the downside to value stocks is a bit less than it is with growth stocks.
Sure, AAPL stumbles a little here and there, but for the most part, it always recovers and keeps growing.
But the question remains: Is Apple still a “growth at a reasonable price” stock?
Definition of a GARP Stock
The problem with growth stocks is when growth starts to flag, the stock can fall precipitously. If those growth stocks are also momentum stocks, the risk increases even more.
My own definition for a growth stock means that earnings are organically growing at least 13% year-over-year. By “organically,” I mean actual net income.
That eliminates the financial engineering some companies engage in by repurchasing stock, thereby decreasing the denominator (shares) in EPS, and making EPS seem like it is growing more than it actually is.
Being a value guy, my favorite stocks are those that fit the growth criteria of 13% net income growth, but are also selling at a price-to-earnings growth ratio of under 1. Although I consider a growth stock potentially worth buying if the PEG is even as high as 2, if it is under 1, I’ve found a bargain.
It also may mean that there’s a margin for error already priced into the stock.
Is Apple Still a GARP Stock?
Apple earnings were reported on Tuesday. Let’s take a look at the numbers and see if AAPL is still a GARP stock, and also check a few numbers besides the headlines to make sure things under the hood look stable.
Right away, things look spectacular. The bottom line for Q4 rose 31% to $11.1 billion. For the full year it increased 35% to $53.4 billion.
Next, I always back out net cash from a company’s stock price, so that we are evaluating what the market says the actual business is worth. Apple stock has around $152.3 billion in net cash, or $27 per share in cash. At its current price of $117, AAPL stock is effectively trading at only $90.
With a market cap of $655 billion, it is trading at a P/E of only 12.7. As you can see from the net income increases YOY, Apple is trading at a trailing PEG ratio of about 0.4.
That is unbelievable. It is also a screaming buy, even here.
Is there anything lurking in the financials to undermine this assessment? I don’t see anything. Net sales grew 22% in the quarter and 28% in the fiscal year. Not only that, cost of sales only grew about 18% in the quarter and 25% for the year, meaning that revenue was growing greater than or equal to cost of sales, which means gross margins improved.
Despite spending $17 billion on stock repurchases dividends, the cash balance still grew by $50 billion.
These numbers are truly amazing. With Apple as a brand enjoying global recognition, and its products clearly soaring off the shelves, the company remains on a stellar path to success.
As of this writing, Lawrence Meyers was long AAPL.
