On Friday, June 12th, Apple’s share price closed at $127.17. This represents a valuation of 15.72 times trailing 12-month earnings of $8.09 and about 14.10 times the current Wall Street consensus earnings per share estimate of $9.02 for the fiscal year ending in late September.
As I will illustrate in this article, I consider today’s valuation of Apple to be low and I expect the share price to move significantly higher over the next six months.
Apple’s Revenue And Earnings Trend
Following a five-quarter period of single-digit revenue growth that ended in the June quarter one year ago, Apple’s revenue has risen on a year-over-year basis by nearly 25% over the most recent three fiscal quarters. The graph below illustrates the rebound in Apple’s revenue growth rates and the beginning of the company’s current fast-growth epoch that will continue through next fiscal year.
Apple’s earnings per share have risen nearly 39% over the same nine-month period. The graph below illustrates the return to earnings per share growth that began in FQ1 2014 and the acceleration of the earnings per share growth rate over the most recent six fiscal quarters.
Apple’s Net Income And Gross Margin By Quarter
Since the nadir of 36.87% gross margin in FQ3 2013, Apple’s gross margin has rebounded to 40.78% in the recent March quarter. Rising iPhone unit sales have delivered the company’s highest gross margins in three years and the company is now riding down the cost curve on the larger-screen iPhone handsets. The iPhone 6 series handsets will deliver high gross margin through the two-year handset cycle. The graph below illustrates the company’s gross margin recovery over the most recent seven fiscal quarters.
The graph below illustrates the rising percentage of revenue flowing to the company’s net income line since the release of the iPhone 6 handsets. Fast rates of revenue growth combined with higher gross margin have dramatically increased the percentage of revenue flowing to the net income line. The sharp rise year-over-year in the percentage of revenue flowing to the net income line will continue through the end of FY2015.
At present, Wall Street’s consensus revenue estimate for the fiscal year beginning in late September is $244.60 billion or a 5.50% rate of revenue growth over the current Street expectation of $231.82 billion in revenue for FY2015. I’m currently expecting FY2015 revenue of $235 billion and my early FY2016 revenue estimate is $275 billion, representing anticipated revenue growth of 17%.
For the first six months of FY2016 all Apple Watch revenue will be wholly accretive to revenue growth. Additionally, I anticipate a strong iPhone refresh cycle in the fall with Greater China continuing to deliver the fastest rates of growth among Apple’s regional revenue segments. I consider my early revenue estimate to be conservative for the fiscal year.
Apple’s Massive Share Repurchase Program
The graph below illustrates the decline in the reported fully diluted share count as Apple continues through the massive $140 billion share repurchase plan. Since the high of a split-adjusted 6.637 billion fully diluted shares reported in the September quarter of FY2012, Apple had repurchased 12.09% of the fully diluted share count as of the end of the recent March quarter.
The graph below illustrates the dramatic decline in the year-over-year fully diluted share count since the March quarter of FY2013.
According to management, through the March quarter the average share repurchase price on $80 billion in repurchases was $85 compared to Friday’s closing price of $127.17.
In a way, the massive share repurchase program works as a leveraged buyout for the benefit of long-term shareholders.
Apple is leveraging its cash assets to repurchase shares. This boosts the value of the remaining shares and the shares are continuing to be repurchased at a significant discount to future share value. With $60 billion remaining on repurchases under the expanded $140 billion repurchase program, today’s share price presents an excellent opportunity for management to repurchase more shares at what may soon prove to be an attractive discounted price.
Wall Street Discounts Apple’s Revenue and Earnings Trend
I expect significant upward revisions to the FY2016 revenue and eps estimates from Wall Street analysts leading into or following the release of Apple’s June quarter results. The current Street consensus estimate for FY2016 revenue of $244.60 billion is extraordinarily low considering the recent release of the Apple Watch and the prospect for continued strong iPhone unit sales growth year-over-year through at least the first six months following the release of the next iPhone 6 series handsets expected this fall.
The current Wall Street consensus eps estimate of $9.59 for FY2016 is also low considering Apple’s recent gross margin recovery and the ongoing $140 billion share repurchase plan. Because Apple averages the fully diluted share count each quarter, repurchases made in any one quarter will have a beneficial impact on reported earnings per share growth rates through the following fiscal year’s corresponding quarter. In other words, even if the current $140 billion share repurchase program is not expanded and extended beyond the March quarter of FY2017, the beneficial impact of the program on year-over-year earnings per share growth rates will extend through the March quarter of FY2018, nearly three years from now.
On my early revenue estimate for FY2016 of $275 billion, I expect an earnings per share outcome greater than $11.50.
Robert Paul Leitao
Disclosure: The author is long Apple shares