Sunday, March 4, 2012

Apple: Focus On Earnings Growth, Not The Earnings Multiple

On February 11, 2012, I issued a revised 12-month price target for Apple of $790 per share. Since that date the share price has risen about 10% to Friday's closing price of $545.18. Over the next twelve months I expect the share price to rise at least 45% from Friday's closing price to reach above my published target.
Posts At Eventide Axiom #1: Focus on Earnings Growth, Not The Earnings Multiple
In FY2012, I forecast Apple's earnings per share to rise at least 100% from FY2011's $27.68 to over $56. Apple began this fiscal year with an eps gain of over 115% to $13.87 in the December quarter. The March and June quarters will deliver eps growth rates at or near 100% due to strong unit sales of the iPhone 4S and strong unit sales of the new iPad models that will be released later this month. This fiscal year will end with an extraordinary high eps growth rate in the September quarter due to the company's languid performance in the prior-year period. The release of the iPhone 4S in the December quarter creates a soft prior-year comparison in the quarter that closes the current fiscal year. 

Even at a modest multiple of 12.5 times trailing 12-month earnings, at $56 in FY2012 earnings per share, Apple's share price will reach $700 by early November. While it's not practical to forecast the earnings multiple the market will award Apple, it's also not necessary for the multiple to expand to reach my stated 12-month price target. At Friday's closing price the shares are currently trading at 15.52 times trailing 12-month earnings. Even if the multiple contracts, the share price advance will remain on track. 
Earnings growth will deliver strong share price appreciation for Apple whether or not the earnings multiple expands or contracts. 
Posts At Eventide Axiom #2: Applying The "Law of Large Numbers" to Apple is Bunk!
In the December quarter, nearly 75% of Apple's reported revenue was sourced from products that did not exist in the market as recently as five years ago today. With the forthcoming refresh of the Apple iPad product line, the percentage of reported revenue generated by the iPhone and iPad will continue to rise well into next fiscal year. At this time, the market for the Apple iPad can not be accurately determined nor defined and the product line remains in a nascent phase of global market development. 

The chart below illustrates the sources of Apple's $46.33 billion in revenue in FQ1 2012.