Sunday, June 12, 2011

Posts At Eventide AAPL Price Target: $590 Per Share

Few enterprises in recent history have captured the imagination and stirred the emotions of consumers like Apple. Ask most anyone their view of Apple and one is apt to hear spirited responses ranging from high admiration and praise for the company  to complaints about the way Apple seeks to control virtually all aspects of the user experience and the content available to purchase through the various iTunes and app stores. No matter the strong sentiment about Apple, few can dispute the company's extraordinary success and potential for continued growth.
Apple's Share Price Today
At Friday's closing price of $325.90, the shares are trading at levels last seen in the closing days of calendar year 2010. This is despite the fact the share price reached an all-time high of $364.90 in intra-day trading on February 16th. 
There are, of course, macro economic factors impacting Apple's share price performance and investors are currently trapped in a challenging market cycle. But for the first six months of the current fiscal year Apple's revenue has risen by 76.2% and earnings per share has moved higher by 83.2%. These rates of growth and anticipated similar rates of growth for the remainder of this fiscal year are not currently priced into the company's shares. 
On May 31st I published a posted titled Why I'm Bullish on Apple. In that post I mentioned the company's prospects for growth and the factors that will deliver outstanding revenue and earnings growth well into next fiscal year and put forward my current 12-month price target for AAPL of $590 per share. In this post I'll mention a number of other important factors that will deliver an 80% share price gain over the next twelve months.  I anticipate Apple will move back into a share price trading range of 17 times to 20 times trailing 12-month earnings that prevailed prior to April of this year. That trading range in future periods will represent a compression of the share price relative to earnings when the company's high cash balances are factored into the numbers. 

AAPL Share Price Forecast
The graph and table data below detail Apple's share price on the first day of the month following the release of the company's quarter earnings over the most recent six fiscal quarters and my share price forecasts for the next four fiscal quarters. 







Quarterly


Date
Price
Target Price
Price Change


2/1/10
194.73




5/3/10
266.35

36.78%


8/2/10
261.85

-1.69%


11/1/10
304.18

16.17%


2/1/11
345.03

13.43%


5/2/11
346.28

0.36%


8/1/11

404
16.67%
Projected

11/1/11

467
15.59%
Projected

2/1/12

528
13.06%
Projected

5/1/12

587
11.17%
Projected

The linear line in the graph above indicates the share price performance as of May 2nd the share price had fallen below the six quarter average for appreciation even as the pace revenue and earnings growth during Apple's 2nd fiscal quarter ended in March. Since May 2nd the share price has fallen an additional $20 from the closing price of $346.28 on that date and the shares are now trading at an extraordinarily low multiple of 15.53 times trailing 12-month earnings. I expect AAPL to return to a trading range of 17 times to 20 times trailing 12-month earnings over the next 60 days. The June quarter results to be release in late-July will confirm the earnings growth trend established in the first six months of the current fiscal year.

Price-Earnings Multiple Comparison
In addition to an earnings per share growth rate exceeding 80% during the first six months of the current fiscal year, Apple has over $70 in cash and marketable securities behind every share and no long-term debt on the balance sheet. 
Because of the company's hefty cash position there are two different ways in which the price-earnings multiple must be viewed. The graph and table data below detail the closing price and price-earnings valuations on the the first trading day of the month following the release of quarterly earnings. Removing the cash from the valuation model indicates as of May 2nd the shares were trading at a cash adjusted multiple of 13.15 times trailing 12 months earnings and 16.50 times trailing earnings if cash is not considered a material factor. Both metrics indicate the shares were trading well below what had become a fairly consistent trading range. 
Even at today's multiple of 15.53 times trailing 12-month earnings Apple's share price will reach above $425 per share by November 1st, following the release of September quarter numbers and with continued compression of the non-cash earnings multiple. There are no indications the current rate of earnings per share growth will slow between now and the end of the current fiscal year. Returning to an established valuation range will put the the share price above $465 by that date.






Share
Trailing
Earnings
Cash Per 
Cash Adj.
Cash Adj.
Cash %
Date
Price
Earnings
Multiple
Share
Share Price
Multiple
of Price
Feb 1, 2010
194.73
10.24
19.02
43.29
151.44
14.79
22.23%
May 3, 2010
266.35
11.78
22.61
45.19
221.16
18.77
16.97%
Aug 2, 2010
261.85
13.28
19.72
49.43
212.42
16.00
18.88%
Nov 1, 2010
304.18
15.15
20.08
54.92
249.26
16.45
18.06%
Feb 1, 2011
345.03
17.92
19.25
63.98
281.05
15.68
18.54%
May 2, 2011
346.28
20.99
16.50
70.27
276.01
13.15
20.29%


Cash As A Percentage Of The Share Price
On May 2nd the company's cash per share represented over 20% of the share price. At Friday's closing price the cash per share represented about 21.6% of the share price. Both of these percentages are at the high end of the scale when compared to the share price valuation range over the past 18 months. 
As the share price returns to an established trading range of 17 times to 20 times trailing 12-month earnings, it will still reflect  continued share price compression when cash per share is removed from the valuation model. Through the remainder of the current fiscal year Apple will add an additional $14 per share to the company's cash position raising total cash per share to around $85 by the end of the fiscal year in late September. 

Conclusions
There are macro economic factors impacting current stock market conditions and Apple's current valuation reflects this challenging environment for equity investors. Apple's current rate of revenue and earnings growth are not factored into today's share price. 
I expect the shares to return to an established trading range of 17 times to 20 times trailing 12-month earnings over the next 60 days and for earnings growth to propel the shares to my 12-month price target of $590 per share over the next four quarters. Please see my recent post titled Why I'm Bullish on Apple for a comprehensive review of the performance factors that will fuel strong revenue and earnings growth well in FY 2012 and lead to Apple's first $40 billion revenue quarter in the three-month period ending in December. 

Robert Paul Leitao






Disclosure: The author is long AAPL shares
Posts At Eventide Resource Guide
The objective of the Posts At Eventide web presence is to benefit readers seeking to understand Apple's financial performance and to serve as a repository of information and analysis for other independent AAPL analysts preparing quarterly estimates and share price forecasts. Please see the Posts At Eventide Resource Guide for more information.


8 comments:

  1. I think Steve Jobs health concern is the main reason for the recent underperforming all major indices.This concern should be mitigated after Steve gradually detaches himself from daily operation as CEO, and have a new CEO announced.

    ReplyDelete
  2. I'm curious why you think that returning to the "established" range is a foregone conclusion. Could you please expand on this. I think this is the critical question. I've been reading lots of analysis, some take the position that a PE of 14-16 is the new normal for AAPL and others like you and the other indie AAPL analysts have a more optimistic tone. I like Shaw's quote: "the market can remain irrational longer than you can remain solvent."

    Keep up the good work.

    -Bob

    ReplyDelete
  3. Bob:

    Periodically AAPL rises above and falls below established trading ranges. I see today's trading range as a temporary drop below the historical range.

    I will explain my view definitely in upcoming posts. An appropriate response to your earnest question deserves more than a one or two paragraph answer. Stay tuned.

    ReplyDelete
  4. Great analysis, Robert. Thanks! Yeah, it's been very soft here. But still think it will be a performance leader when the market rebounds.

    ReplyDelete
  5. I believe that the recent compression of Apple p/e will continue over the next year due to the difficulty the average investor has in understanding Apple the way analysts like Robert, Andy and Horace do. This will not prevent Apple's shares from rising, albeit slowly. But macro events may be much more crucial for Apple. Most economists still belief the current 'soft patch' is temporary. But my eye has been on the striking similarities between the overall Dow chart from 1932-1950, the S-P chart from 1974-1980, and the S-P from 2009-2011. I don't think there's a way around a correction that will see the S-P remain below 1340 for the next 4 years or so. If that happens(look for it after a brief July earnings-driven rally), Apple likely won't exceed 360 for a number of years. Hope I'm wrong.

    ReplyDelete
  6. joshdean:

    In my latest post I indicated that even if today's lowly p/e multiple of 15.55 times trailing 12-month earnings remains a constant, AAPL will move above $425 per share by early November based on earnings growth alone.

    Earnings growth is the foundation for share price appreciation even if the markets continues to value at a significant discount to current rates of growth.

    ReplyDelete
  7. This site is aesthetically pleasing. The graphics and layout are first class.

    -capa

    ReplyDelete
  8. The website is looking bit flashy and it catches the traffic eyes. layout is beautiful clean and a enjoyable adherent without problems reached interface. Upstox new user code Niche

    ReplyDelete