Tuesday, February 1, 2011

Apple's P/E Multiple With And Without Cash In The Valuation

Apple's P/E Multiple With And Without Cash In The Share Price Valuation
Today marks the first trading day of the month following the release of Apple's December quarter results. For the purpose of tracking Apple's share price performance on a quarterly basis, I'm using the first trading of the month following the release of earnings as a reference date for comparison. 
The graphs and table data below indicate the price-earnings multiple for AAPL with cash included in the share price valuation and with cash removed from the valuation. At today's closing price of $345.03, AAPL is trading at a nominal p/e multiple of 19.25 times trailing 12-month earnings and toward the low-end of the range for the five dates selected for comparison. With cash removed from the share price, the sans cash p/e multiple remains toward the low-end of the range for the five dates selected. 


Cash Per 
Cash Adjusted
Cash Adjusted
P/E Multiple
P/E Multiple
Feb 1, 2010
May 3, 2010
Aug 2, 2010
Nov 1, 2010
Feb 1, 2011

No matter the 77% rise in the share price between February 1, 2010 and today, the share price appreciation has essentially only kept pace with the 75% gain in 12-month trailing earnings per share. The sans cash share price has risen 85% since February 1, 2010 yet the cash adjusted p/e multiple remains well within the recent historical range. At today's closing price of $345.03, AAPL remains moderately priced based on a comparison of the five quarterly dates selected. The shares are positioned for at least modest appreciation over the next few weeks and prior to the expected run-up of the share price in anticipation of March quarter results. 

Robert Paul Leitao


  1. This seems to support my theory that AAPL will only rise retrospectively on results. Investors have stopped believing what they see, and Apple's earning growth continues to run ahead of the market..

    For evidence look at this chart over at Asymco.com (phenomenal blog btw), which shows what happened to the P/E in '08 and from which it never recovered.

    I bought in in '06, and there was a common line then that AAPL was sell at P/E 40 and buy at P/E 30.. seems to me the rationale for Apple's continuing success is far far greater today than it was in '06.

    Asymco chart: http://www.asymco.com/wp-content/uploads/2011/01/Screen-shot-2011-01-23-at-1-23-9.01.24-PM.png

  2. Why do you say Apple remains "moderately" priced when its actually a dollar below your "Low" price forecast from Nov 14? Just wondering. http://www.postsateventide.com/2010/11/cy-2011-aapl-price-forecasts-and-price.html

  3. Great post Robert.

    Just for future reference, have you subtracted the effects of the cash on the balance sheet on Apple's earnings to get the cash adjusted P/E multiple? Ie did you subtract the OI&E from net income and then divide by number of outstanding shares to get your cash adjusted earnings per share figure?

    The only reason I ask is that it might be useful to have this data to hand as once interest rates start rising, OI&E will become more significant and will therefore affect the ex-cash P/E multiple more significantly.

    Keep up the great work.


  4. Jon T:

    If Apple's share price appreciation continues to track with eps growth, the share price may approach $700 within 21 months and without an expansion of the nominal p/e multiple from today's level.

    The p/e multiple is not my concern at this time of extraordinary eps growth. There's plenty of share price appreciation potential and I remain focused on the value and not the earning multiple. You make a good point.


  5. Anonymous:

    Moderately priced is in the context of the recent historical valuation. The market has not awarded a higher multiple based on expectations of near-term 70% eps growth. The point is no matter the 77% share price gain in a year, the shares remain moderately priced with real prospects for appreciation over the next few weeks and especially as we head toward the end of the March quarter.


  6. Thanks Robert,

    You really do make it easy for us southerners. :)

  7. JonathanU:

    Over the past few quarters interest or net earnings on the cash and marketable securities have been virtually immaterial to results. As interest rates rise the increasing return on these assets will further boost earnings and will warrant a closer look and an analysis separate from earnings generated from product sales activity.

    I'm looking forward to that eventuality.


  8. I am more conservative and it will play out nicely and make this stock that much more value oriented to own over the long run... I feel the shares will underperform their actual earnings performance. I see an ending price of $450 Dec 31 2011, and $675 on Dec 31 2012. I sure hope so as I own a boat load of Jan 13 $320 calls.

    I think we will see the PE multiple continue contract... The beauty of this, is that there is very little downside risk to the stock with such a low PE, even if something goes wrong in the global setting ie. War, Higher Oil, etc.

    It also gives Apple more flexibility to low ball wallstreet with conservative estimates and with such low PE ratio there is little downside risk even with very conservative guidance, and then outperform their guidance and the stock spikes.

    As a trader and long term investor of Apple this creates the best scenairo I could ask for... I like slow steady share price growth of 20-30% per year against an earnings back drop of 45%+... I have little downside risk, and can use a lot of cheap leverage to make huge windfalls on the upside surprises... If they miss then I have limited loss as the share price will not drop very far.

    I would rather Apple maintain a FWD PE of 10 and for the company to keep growing at 25% per yearr for the next 6-7 years. I will make millions under this scenairo as I buy a lot of DITM Calls and Spreads... As long as this stock trades sideways to +10% per year I will make 50%+ year after year.. .It doesnt take a rocket scientist to figure out what kind of returns 50%+ per year on a decent base of capital over 7 years will provide me... How about retirement before I am 50! :)

  9. DT, this is a minor quibble perhaps. But you have done so much to hone the accuracy of the metrics, it seems in character.

    Any company requires a certain minimum level of cash to conduct its normal business operations. Thus, when adjusting share price, I follow a practice of backing out only "excess" cash. In the case of Apple, I have assumed $10B in necessary and the remainder is "excess".