A Move Steve Jobs Would Have Loved
Shares Could Rally 50%
Value Stock Apple (AAPL 114.21) is a Bargain
There’s a war going on! Growth investors are proclaiming that Apple is done, kaput. It’s history. As my Cabot colleague, Paul Goodwin, the masterful editor of the Cabot Wealth Advisory and Chief Analyst at the Cabot Emerging Markets Investor, remarked, “For any growth investors out there who have their eye on AAPL, I’ve got to ask, “What the heck are you thinking?” You can read about Paul’s thoughts on Apple in his September 12 Cabot Wealth Advisory. Simply click here.
To a value investor, however, Apple shares are an irresistible bargain! As Paul points out, Apple sells at a very reasonable 13 times earnings and pays a nice dividend yielding 1.9% annually. Further, Apple’s PEG ratio (current P/E divided by the forecast growth rate) is also very attractive at 0.86.
Paul Goodwin astutely concluded that Apple’s revenue growth decelerated in 2012, 2013 and 2014. I have dug a little deeper into the company’s recent revenue and earnings results, though. During the past four quarters, 12-month revenues have increased from 7% to 15%, to 21%, and to 25% for the most recent 12-month earnings per share year-over-year increase.
After lackluster results in previous years, recent revenue trends are clearly accelerating. Earnings per share increases are even more impressive: from 14% to 29% to 36%, and to 40% for the latest 12-months ended June 30, 2015. The current momentum is amazing for a company with annual sales of $224 billion and with $35 billion in cash sitting idle.
“Apple Shares Could Rally 50% on New iPhone Plan” —Barron’s
In an article on Saturday, Barron’s writer Alexander Eule proclaimed that Apple’s plan to lease iPhones and offer other free annual upgrades could pay off “handsomely” for the company and its investors. “A move Steve Jobs would have loved.”
What’s the big deal? Apple’s latest iPhone will soon be available on a monthly payment plan, starting at $32, with customers getting “free” upgrades every 12 months. The leasing program could be a game changer for the stock. Mark Mulholland, portfolio manager of Matthew 25 fund, thinks Apple shares are worth $170, a cool 49% above the current price.
Apple’s leasing program will compete with wireless carriers, which all offer their own installment plans for iPhones and other smartphones. Apple’s plan takes advantage of its 266 U.S. stores, which offer a better retail experience than those of smartphone carriers. Apple is also including its AppleCare warranty program as part of the monthly fee.
The leasing plan is designed to sell more phones and generate higher profits per phone, making it a win-win for the company. As buyers turn in their iPhones after one year, the old phones could become a profitable way for Apple to sell phones in emerging markets at bargain prices.
The new iPhones will hit store shelves on September 25. Any positive news about the leasing program will become a catalyst for Apple shares, especially since good news could also drive additional customer traffic into Apple stores.
“Today, Apple’s fair price is $170-plus.” Mulholland says. “Three to four years down the line, it is easily $200 to $250. And these aren’t aggressive numbers.” During the past month, Apple’s stock price has declined 0.89%, which is much less than the Standard & Poor’s 500 Index 5.99% tumble. Since January 1, AAPL shares have climbed 3.47% compared to the S&P 500’s decline of 4.75%.
Apple’s sales will likely increase 28% for the recent 12 months completed September 30, 2015. Sales will advance another 14% in the following 12 months, although the gain could be somewhat smaller depending on how Apple accounts for new lease income. Earnings per share will climb 26% for the 12 months completed September 30, 2015, and then advance 25% in the following 12 months
I currently recommend waiting for Apple’s stock price to test its recent lows and then buy when the stock price hits $101.75 or below. I advise selling if AAPL rises 56% to my sell price target of 158.50, which will likely occur within two years. For value investors, I can’t find a better bargain than Apple!
I will probably hike my Minimum Sell Price for Apple during the next few months, but you’ll need to subscribe to my Cabot Benjamin Graham Value Investor to find my new sell price recommendations for Apple. My Minimum Sell Prices are updated every month. To join my family of subscribers, click here. You’ll be glad you did.
Until next time, be kind and friendly to everyone you meet.
J. Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor