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Is Apple Set to Continue Shining?

 

Tuesday, September 12th, 2017


Today, Apple (AAPL) announced the launch of its 3 new iPhones, one Apple Watch, and the Apple 4K TV. There was much excitement surrounding the launch as investors/consumers have anticipated the event for most of this year. It is important to note that most of the excitement was already baked into the stock price and AAPL stock actually fell 0.4% to close the day.


The company has been a strong performer throughout the course of the year as the current stock price of $160.86 is near the 52-week high of $164.94 and well off the 52-week low of $104.08.


Looking at the valuation ratios, the current Price/Earnings ratio is 18.37, while the industry average is 19.85. Price/Sales of 3.73 is above the industry average of 2.67. Price/Tangible Book value of 6.71 is higher than the industry average of 6.07 and Price/Cash Flow of 14.67 is also above the industry average of 13.14. The Price/Earnings ratio proves to be the only ratio that is favorable against the industry, as we like to see valuation ratios lower than the industry average. This may be a signal that Apple is beginning to get a little pricey.


The company pays a small dividend of 1.59% and only uses 26.54% of earnings to pay out that dividend. This is beneficial as the company has excess earnings to invest in other parts of the business after paying the dividend. It also shows the dividend is very safe at its current level and that the company can increase it moving forward.


Sales have grown by 1.5% year over year versus the industry average of 2.1% and EPS has grown by 2.7% over the same time period compared to an industry average that declined 6.1%. With the release of Apple’s new products and what some experts are calling the super cycle, Apple should continue to see both sales and earnings growth. One other area that has been extremely successful for the company has been its service business. This business has witnessed strong growth and is now the size of a Fortune 100 company.


Turning to the balance sheet, a current ratio of 1.39 provides liquidity for the company and the Total Debt/Equity is 81.8%. The total debt continues to rise for Apple and now stands at $108.3 billion. For comparison, at the end of 2015 total debt was $64.3 billion. While this looks like a potential problem, the debt/equity is still manageable as the ratio is under 100%. It is also important to note why the debt position has increased. Apple’s cash hoard has swelled to $261.5 billion. The problem is that 94% of the cash is held overseas. Since Apple had such a strong balance sheet, it opted to borrow money at a low interest rate rather than repatriate the money and pay high taxes.


Looking forward to September 2018 and using a forward multiple of 16.5 on estimated GAAP EPS of $10.82, we get a target sell price of $178.53. This would provide a narrow-estimated return of approximately 11%. This would place Apple in the hold category as we only like to buy companies when we have a nice margin of safety and an estimated return of at least 30%. Although Apple has a lot of positives, don’t allow the popularity of the name to persuade you into overpaying for the earnings, sales, cash flow, and assets of a company.

Do you have a question or a company you would like us to take a look at?
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