Zaky: Why Apple shares will hit $400

“Just how much is Apple really worth? The very first thing investors learn about fundamental analysis is that stocks are generally valued on a price-to-earnings ratio, and that a stock’s growth rate is what determines the multiple it receives in the analysis,” Andy M. Zaky writes for Fortune. “For example, on a traditional trailing 12-month P/E valuation analysis — where one multiplies Apple’s $15 in earnings per share by its 70% growth rate — Apple (AAPL) ‘should be’ worth about $1,050 a share on a trailing basis come this October.”

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“Yet, as anyone who takes valuation seriously knows, stocks are seldom valued on their trailing P/E ratio,” Zaky writes. “Instead, the market tends to value stocks based on their future expected earnings and long-term expected growth rate. Cash also plays a very important role in the analysis, but not in the way one would expect.”

“So setting aside the issue of Apple’s enormous cash position, Wall Street analysts are generally modeling for Apple to earn $14.43 in EPS for fiscal 2010 and approximately $17.47 for fiscal 2011 – that’s annual earnings growth of about 21%. As far as what is expected out of the company over the next five years, analysts are modeling for about 18% earnings growth,” Zaky writes. “Thus, based on these conservative variables, Apple should be currently trading at about 18 times next year’s earnings of $17.47 in EPS, or about $314.46 a share. That’s $54.46 below Friday’s close.”

Zaky writes, “Based on $20 in EPS for fiscal 2011, Apple should be trading between $380 and $400 in late 2011 or early 2012 assuming a multiple of 20. This price target beats the Street by nearly $70 and presents a conservative, simple, and straightforward analysis of Apple’s valuation.”

There’s much more in the full article – recommended – here.