Apple: Rising Earnings, Rising Cash, Falling Multiple

Apple ended a challenging week on Wall Street at $373.62 per share, down $3.75 on the day and off $16.86 for the week. Friday's closing price represents a multiple of 14.79 times 12-month trailing earnings of $25.26. At Friday's closing price, the company's hefty cash position of $81.21 per share is equal to 21.73% of the share price valuation. With a current 12-month eps growth rate of 90.21%, a price-earnings multiple of 14.79 and over $81 standing behind each fully diluted share, Apple is trading at a dramatic discount to growth even with high levels of cash underlying each of the 940 million shares outstanding.

Apple: Rising Earnings, Rising Cash, Falling Multiples

The chart below tracks Apple's price-earnings multiple on dates occurring early in the first full calendar month following the release of quarterly results for the past seven fiscal periods. The chart also tracks the rising amount of cash standing behind each share in the fully diluted share count.

Cash As A Rising Percentage of The Share Price

Over an eighteen-month period beginning in early 2010, and soon after the retrospective elimination of deferred revenue accounting on the iPhone, Apple's earnings per share has risen consistently while the company's price-earnings multiple has continued to drop.

The graph and data table below illustrate and delineate the company's rising cash position, falling price-earnings multiple and accelerating rates of earnings per share growth over the past 18 months. At Friday's closing price the shares are trading at a valuation relative to earnings rarely seen over the past eighteen months, and at an increasing discount to the rates of earnings growth especially when the company's cash per share is added to the valuation mix.

Although economic and political concerns last week took a toll on Apple and the broader market, the sell off only highlights the discount to which Apple is valued relative to the pace of earnings per share growth and the company's extraordinary high cash position. The pace of earnings per share growth over the most recent 12-month period has reached over 90%, from August 2, 2010 through Friday's closing price on August 5, 2011, yet the share price has risen only 42.7% over the same period while the company has added almost $32 in cash per fully diluted share.

		Trailing	P/E	Cash	Cash %	12-Month	12-Month
Date	Price	Earnings	Multiple	Per Share	of Price	EPS Gain	Share Gain
Feb 1, 2010	194.73	10.24	19.02	43.29	22.23%	-	-
May 3, 2010	266.35	11.78	22.61	45.19	16.97%	-	-
Aug 2, 2010	261.85	13.28	19.72	49.43	18.88%	-	-
Nov 1, 2010	304.18	15.15	20.08	54.92	18.06%	67.03%	60.68%
Feb 1, 2011	345.03	17.92	19.25	63.98	18.54%	75.00%	77.18%
May 2, 2011	346.28	20.98	16.51	70.27	20.29%	78.10%	30.01%
Aug 5, 2011	373.62	25.26	14.79	81.21	21.73%	90.21%	42.68%

EPS Growth and Share Price Growth

The chart below illustrates the extent to which the rate of 12-month earnings per share growth from February 1, 2011 through August 5, 2011 has far outstripped the rate of 12-month share price growth. In the three months prior to February 1, 2011, the 12-month eps growth rate and the 12-month share price appreciation rate moved virtually in tandem. Apple is trading not only at a significant discount to the current rate of eps growth, the company's rising cash position is not sufficiently factored into the current valuation. 

Factors Impacting The Share Price

In addition to economic concerns over the slow pace of growth in the US economy and political intransigence in resolving the nation's debt problems, market concerns about the release date for the iPhone 5 is impacting the share price.  In the recent June quarter the Apple iPhone represented about 47% of reported revenue and the iPhone and Apple iPad combined represented 68% of the revenue total. 

Also overhanging the share price is the current Wall Street consensus estimate for FY 2012 eps of $32.22. This consensus estimate is only 28% higher than the current 12-month eps total of $25.26 through the recent June quarter. The new fiscal year begins in late September. For the current fiscal year earnings may reach as high as $30 per share. The Wall Street consensus eps estimate for FY 2012 will move significantly higher between now and the close of the calendar year.

Conclusions

For long-term investors patience may have its own rewards. The economic and political concerns impacting the market create buying opportunities. A release date for the iPhone 5 may soon be announced and Apple's rising cash position will continue to buttress the company's already strong balance sheet. From both a value and growth perspective, Apple trades at a significant discount to current earnings growth. The gap between the rates of 12-month earnings-per-share growth and 12-month share price growth will eventually close. I will soon be updating my current 12-month price target of $590 to well over $600 per share. 

Disclosure: The author is long Apple shares

Robert Paul Leitao