For the past several years there have been few, if any, hotter stocks on Wall Street than technology behemoth Apple Inc. (AAPL – Free Apple Stock Report). It is the cornerstone of many individual portfolios, prevalent in numerous high-profile mutual funds, and was added to the Dow Jones Industrial Average less than one year ago. Its flagship product, the iPhone, is the clear cut leader among smartphones, and its iPad enjoys a handsome share of the tablet market. Add to this the recent success of Apple TV and the potential of its newest unveiling, the Apple Watch, and the company seems poised to extend its dominance across numerous end markets. But have investors already missed the boat with regard to its growth trajectory or is there still time to get on board? We will get down to these brass tacks using the latest Value Line report by analyst Justin Hellman.
The first thing that grabs our attention is the stock’s Recent Price located on the Top Label of the report. Hand in hand with this is the Price-To-Earnings Ratio, which is also something that needs to be pointed out and can be found to the direct right of the price. AAPL shares were trading around $107 at the time this page went to press. For the record, it is now even lower at the $100 mark. Both of these prices equate to a price-to-earnings ratio of around 10. Tech stocks tend to trade at lofty P/E valuations, and the general market P/E for 2015 according to our in-house calculations is 19.7. So, right off the bat, we know that AAPL is trading at a significant discount to its enormous earnings potential. Clearly, there is something the investment community sees that is turning the sentiment on this stock unfavorable. Let’s take a deeper look and see what that might be.
When you first think of Apple, tremendous year-over-year growth in sales and earnings comes to mind. When the last recession began in 2007, the company had annual revenues of $24 billion. In fiscal 2015 (years end September 30th), that figure ballooned passed $233 billion. Investors have become used to sizable annual gains. That said, looking at our Quarterly Sales box on the lower left-hand column, our expected figure is $245 billion. Yes, still a huge amount, but a sharp falloff from the year-over-year gains of the past. The same scenario develops when using the EarningsPer Share, which is just below sales. In 2007, share net was just $0.77, and in fiscal 2015 that amount skyrocketed to $9.22. This year, we are looking for a bottom line of $10.00 a share, or up 8.5% from the previous tally. The company’s products are either maturing (iPhone) or still in early phases (Apple Watch) and that is not an ideal combination. Results are apt to take a breather and investors are prone to take profits and go elsewhere in search of more robust growth rates.
No one knows its markets better than Apple itself. It realizes that near-term results will not be as astronomical as in years past. So what can it do to keep investors on board until the growth engine refuels? Current income is always a solid way to assuage short-term worries. This is apparent from our Quarterly Dividends Paid box. At the start of this decade, Wall Street clamored for AAPL to return some of its sizable cash hoard (more below) to shareholders. Initially, the company balked, but then began a quarterly payout near the end of fiscal 2012. The first payment was $0.38 on a quarterly basis. Presently, that stipend is running at $0.52 a quarter and backed by Apple’s superior cash-flow generation. We expect it to climb to the $4.00-per-annum plateau by 2018-2020, as evidenced by the number in our Statistical Array at the top of the page. The yield should continue to hover above 2% and stay in proximity with the Value Line median over that span. This level of current income should be enough to keep investors satisfied for the time being.
In the meantime, a catalyst outside of quarterly results will be needed to spark enthusiasm, and few, if any, companies are in better shape to make headlines on the mergers-and-acquisition front than Apple. In the Ratings box in the lower right hand corner of the page, subscribers will note that AAPL’s FinancialStrength is A++, our highest grade for this designation. Moreover, a glance at the Current Position box in the middle left of our page shows that this tech behemoth is sitting on cash assets that exceed $41.6 billion as of the close of fiscal 2015. Undoubtedly, Apple has the financial wherewithal to make a move that may well result in a share-price rally. None of this speculation is in any way factored into our presentation. However, whispers on Wall Street are growing louder that potential maneuvers could be percolating in the near future. Wearables are gaining some momentum on the tech front, and Apple is certainly already visible in that field. Too, forays into the car industry have been hinted at in the past. With all that in mind, GoPro (GPRO), Fitbit (FIT), and Tesla Motors (TSLA) have been prominent names thrown out by speculators. Again though, practically nothing is off the table when dealing in this altitude of cash on hand.
For this reason, we think that AAPL stock has plenty of upside potential out to decade’s end from recent price levels. It is a solid addition to many portfolios, and now looks to be a most opportune time to begin building a position.