Why Apple’s stock actually looks cheap

Apple Online Store“Despite my roots as a value manager, in recent weeks I have been a fairly aggressive buyer of Apple (AAPL) shares,” Chad Brand writes for Seeking Alpha. “Such an investment may not seem appropriate for a value investor but as the stock has steadily fallen, dropping below $250 per share, it has actually become quite undervalued. And not just relative to its growth rate, but the broad market as well.”

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“Flush with $45 billion in cash and investments ($50 per share) and no debt, Apple sports an enterprise value of about $190 per share,” Brand writes. “Compare that to $15 of earnings this year and enough catalysts to make next year’s estimate of $18 seem easily attainable, and you have a stock that actually trades at a discount to the S&P 500. And therein lies the core explanation for my heightened interest recently. How can Apple trade at a discount to the market after factoring in their balance sheet?”

Brand writes, “The iPhone has been a runaway success… iPad seems to be catching on in the corporate world far faster than most had expected… Not only that, but I continue to expect that Mac sales will continue to grow. It is true that some iPad sales could cannibalize the laptop business at Apple, but I fully expect Apple’s overall share of the global PC market to continue to edge higher in coming years… Apple stock around $240 per share (today’s price) will likely prove to be a great buy a year from now. My personal target is $300 and it does not take overly aggressive assumptions to get there.”

Full article here.

13 Comments

  1. No problem with his thinking except, my personal target is $300 to $350 with only the markets Apple has told us about. Through in Steve Jobs’ “Just one more thing” and the power of a billion dollar server farm and this target goes way past $350 in a heart beat.

    Man up talking heads, if you could strap on a pair, PICK A REAL TARGET or just say you are not the one to ask about such OBVIOUS things.

  2. I love how people here as well as bloggers and pundits alike all feel like a stock split will put more money in their pocket. It won’t. Stock splits don’t add even a penny of value. All you get are more shares for the same value as your current investment. Nothing more, nothing less.

    As for targets, big woof. To me, they’re meaningless. Like stock splits, they’re the equivalent of the feel-good movie of the summer. Ask yourself: when was the last time that you saw a price target projection ever hit its mark? I can’t recall even one.

    What does matter to me are three things: the company’s earnings, its cash flow (particularly how much solid cash and marketable securities on hand) and debt. Viewed that way, Apple’s balance sheet gives me a lot of confidence for its long-term prospects.

    Peter Lynch, the founder of the Fidelity Magellan Fund, correctly states that a company’s earnings will always track its stock price – eventually. That last word is important. The two don’t move in lock-step. And that is why stock price projections may be right, but not at all when you think they will be.

    That may actually create opportunities such as those we see now in Apple’s stock valuation. I believe Apple is oversold by institutions, and that creates a modest opportunity. It’s not as good as in 1997, when the stock was trading at a split-adjusted $8 per share. But certainly Apple stock is valued at a discount right now. And for once, the little guy might be able to win a round from the institutions that manipulate stock prices. All we need is some good research and patience.

  3. @Brian
    One hundred shares of AAPL runs around $24,250 plus transaction fees right now. I believe the theory is that if a stock split reduces the share price sufficiently to enable more investors to purchase round lots, then the amount of investor interest will increase, thus driving up the stock price. This would theoretically result in a larger, although possibly temporary, bump in the company’s market cap post split.

    As a long term investor, however, I treat stock splits as value neutral and move on. I wouldn’t try to jump in to time the possible bump from a stock split.

  4. @Brian
    That was my point exactly. People think a split somehow doubles their money. Well, those people that think that probably don’t even own any AAPL to begin with.

    @KingMel
    That used to be the old reasoning for a stock split, to reduce the entry point for stocks. But now in the digital age, when buying in even lots isn’t a requirement, it doesn’t hold as a valid reason to split. Go onto etrade and buy 5 shares or 500. It doesn’t matter to them, the commission is the same either way.

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