“Investors dream about finding obvious disconnects. Widespread misunderstanding leads to huge opportunity. We have such a scenario developing with Apple,” Jason Schwarz writes for Seeking Alpha. “Although Apple is the most widely followed stock on Wall Street it is clearly the most misunderstood.”
MacDailyNews Take: An aside: Think about AAPL ten years ago. “Most widely followed stock on Wall Street” it was not. It’s amazing how far Apple has come!
Schwarz continues, “The current perception among traders is that Apple is expensive because of its 150% rally off of the March 2009 lows. Seriously, if I polled 1000 traders I believe that 95% of them would look at the 33 p/e ratio on their screens and tell me that they’d love to own Apple but it is just too expensive. What they don’t know, is that the 33 P/E is about to drop significantly and will set up the opportunity of 2010.”
“Since 2003, Apple has consistently traded at an average P/E ratio of 32.17 which is consistent with today’s current P/E of 33. You can tell that traders have done their homework and are strict followers of the P/E valuation. If you’re like me, you don’t care too much about current P/E ratios because they are calculated from past results. The number that really matters is the forward P/E ratio because it is calculated from future estimated earnings,” Schwarz writes.
“Well, the average forward P/E ratio for Apple since 2003 is 22.48. Any guesses what it is now? Based on the new accounting rules soon to be put in place, and the 37 billion in cash that Apple has on their books, Apple’s forward P/E is below 13,” Schwarz writes. “This stock has not been priced this cheaply since Steve Jobs came back to Apple in 1997.”
“Based on expected earnings per share of only $11.70 in fiscal 2010 (many think earnings per share according to the new accounting standard will end up closer to $13) the stock should be priced at $263 today and should reach $376 by September 30, 2010. These prices do not reflect great years for Apple, they simply reflect the averages,” Schwarz writes. “You want to know what a great year would look like on September 30, 2010? Let’s use the P/E ratio from just before the recession began in 2007. With the iPhone added to the Mac and iPod lines, Apple stock was soaring. Its forward P/E was 28.63 and its current P/E on September 30th 2007 was 39.05. If we used those ratios in 2010 it would put Apple stock at $456 by the close of its fiscal year on September 30th.”
Full article here.
[Thanks to MacDailyNews Reader “Mike in Helsinki” for the heads up.]