The investors who are selling Apple Inc. shares following the company’s first quarterly earnings miss in more than six years may want to think again.
The shares lost 5.6 per cent on Wednesday, a day after the announcement. But while Apple certainly faces tough competition from the emerging Android mobile platform, its valuation has rarely been so tempting.
The shares trade at just 14.5 trailing 12-month earnings. Since 1997, when the late Steve Jobs retook the helm of the company he co-founded, the shares have traded at this level, or slightly less, on only three occasions: during a short period following his return, during the bursting of the dot-com bubble at the end of 2000 and during the financial crisis of 2008. The median price-to-earnings multiple over this period was 34.3.
Apple shares now trade at about 11 times estimated 2012 earnings. Discounting the approximately $80-billion (U.S.) in cash and cash equivalents that Apple hoards, the PE multiple drops to about nine.
The average forward-looking PE among S&P 500 companies is about 11. Is Apple just average? Hardly. The company just posted a 54-per-cent jump in profit ($6.6-billion U.S.) on revenue that rose 39 per cent ($28.3-billion) for the three months ended Sept. 24.
The impressive results fell slightly short of the Street’s forecasts due to lower-than-expected sales of iPhones, iPads, and iPods. But management’s updated outlook for the current quarter exceeded analysts’ estimates, calling for record share profit of about $9.30 on record sales of about $37-billion.
The underlying numbers also tell a bullish tale, with return on common equity hitting 41.7 per cent last quarter, twice the median of 20.3 recorded over the last decade. Cash flow per share has sky rocketed to $11.24, compared with an average since 1990 of $1.25.
Some analysts warn that the shares are likely to be volatile in the short term, as investors react to the earnings miss, wait for data supporting the next leg of growth and adjust to the company’s new era without its visionary leader.
But they point to numerous trends that should support a higher share price, including red-hot growth in emerging markets. Sales of iPhones in the Asia Pacific region, for example, more than doubled year-over-year. The company says 15 per cent of revenue last quarter came from China.
“China and other emerging markets such as Brazil, India, and Indonesia could drive a multiyear product cycle for Apple, particularly with new lower-priced iPhone products such as the iPhone 4 and 3GS,” Michael Walkley, an analyst with Canaccord Genuity Corp., wrote in a report this week.
In addition, sales of Mac computers hit a record 4.9 million units last quarter, topping most analysts’ expectations. Demand also appears strong for the latest iPhone, with four million iPhones 4S units selling in the first three days following its release.