Is now a good time to buy Apple stock?

Shares of Apple Corporation have taken a heavy downward spiral in the last 7 months. On October 12 2012 the shares were a little over US$ 700 each, whereas they had fallen to US$ 398 at close of trading yesterday. This downward spiral is against huge gains across the board on stock markets with some stocks gaining well over 160% in the same time period. Much of the sell off is caused by market fears that Apple cannot create the same level of business it has with the huge past success of the iPhone and iPad and therefore cash flow’s will suffer. But is this sell off irrational and is now a good time to buy Apple shares?

Future growth

One metric investors use to evaluate a stock is ‘Discounted cash flow (DCF).’ Much of Apple’s revenue growth over the last five years has come from overseas markets; previously the majority of Apple sales were in the US. Some analysts predict that the overseas growth will now level off as the company has had an “innovation lull.”  

Let’s first deal with the current products – analysts base their current stock price targets on expectations of iPhone 5S shipments of 24 million units in the next couple of quarters, although at these levels the bar is set very low against past performance and there are positive indications that they could ship between 35 million or 40 million units.

Innovation -- the biggest immediate change in the iPhone is going to be iOS 7 when it comes out in the autumn of this year, going forward industry experts are predicting the next iPhone could also have a fingerprint sensor. In addition Apple is rumoured to release an electronic pen device and also an iPad Mini with a Retina display. These features will certainly add some shine to Apple’s products as well as their future cash flow.

Price to earnings ratio

P/E or price to earnings ratio is one of the most frequent used measures for valuing a stock, it’s a simple metric and does not give you as much feel as discounted cash flow, but nevertheless it is a tried and tested method. P/E ratios are highly dependent on capital structure. Leverage (i.e. debt taken on by the company) affects both earnings and share price in a variety of ways, including the leveraging of earnings growth rates, tax effects and impacts on the risk of bankruptcy, and can sometimes dramatically affect the company's results. 

Value investors will often cite a P/E ratio below 10 as a possible good investment. Apple’s P/E is currently 9.5. With more than US$ 130 billion in cash and marketable securities the P/E is at an all time low for any company.

Tim Cook putting his money where his mouth is

A recent proxy filed by Apple reveals that CEO Tim Cook has chosen to forfeit up to one third of his stock-based compensation if Apple’s stock underperforms relative to other S&P 500 components.

At today’s stock price, that means Cook will give up US$ 130 million if Apple shares perform in the bottom third of S&P 500 components over the next eight years. And he’ll give up half of that if it performs in the middle third. Cook does not receive a very large salary comparable to other CEO’s as is the norm with Apple; he receives a smaller salary and larger stock options. This is putting considerable faith in the future of Apple shares going forward and I always like to see a stock where executives have ‘skin in the game.’ 

So is Apple a good buy?

Based on DCF Apple’s shares could be trading at US$ 600 to US$ 620, so at present they are significantly undervalued. The analyst consensus is a strong buy with recommendations of a price target of US$ 540. This positive upside in stock value is further aided by a healthy growing dividend and a company stock buy-back program.

Disclaimer: The content on this blog is provided as general information only and is not investment advice. Content should not be construed as a recommendation to buy or sell any specific security or financial product, or to participate in any particular investment strategy. The ideas expressed on this site are solely the opinions of the author and do not necessarily represent the opinions of firms affiliated with the author. The author may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Any opinions, news, research, analyses, prices, or other information contained on this blog is provided as general market commentary, and does not constitute investment advice. The author will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your professional investment adviser before making any investment decisions. Perform your own due diligence.


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