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. 

Apple's $170 Billion Fiscal Year

On September 25th, Apple entered its current fiscal year with the strongest product line in the company's storied history. In a recent article titled Apple's 25% Solution, I provided an overview of Apple's extraordinary FY 2011 revenue and earnings growth performance, including the nearly 25% of recognized revenue that flowed to the net income line. Today I'm publishing my preliminary revenue and earnings per share estimates for FY 2012. For the current fiscal year ending next September, I anticipate 57% revenue growth to $170 billion and earnings per share growth of 66.2% to $46. 

In FY 2012, Apple will surpass HP in revenue to become the nation's largest technology company and maintain its position as the most highly valued enterprise in the industry measured by market capitalization.

The graph below illustrates the percentage of revenue I anticipate each of Apple's major product lines will contribute to the $170 billion recognized revenue total.

The Apple iPhone As The Principal Growth Catalyst

Before I delve into an overview of the anticipated unit sales and revenue performance for each of Apple's major product lines, mention needs to be made of the Apple iPhone as the company's growth catalyst. In FY 2012 I anticipate the popular smartphone line will represent 50% of Apple's recognized revenue and about 62% of the expected 57% rise in revenue. Almost 75% of Apple's projected FY 2012 recognized revenue will be derived from iOS-based products including the Apple iPhone, the Apple iPad and the iPod touch. Each of those products have been brought to market within the past five years. 

The Apple iPhone alone will deliver over $85 billion in revenue in FY 2012 or an amount equal to at least 130% of the company's FY 2010 recognized revenue total.

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.

Apple's Net Income Relative To Revenue Continues To Rise

On July 19th Apple reported record revenue and earnings for the three-month period ended in late June. The third fiscal quarter's 82% revenue growth to $28.571 billion and 122% earnings per share (eps) growth to $7.79 represented surprisingly strong results due to better than expected sales of Apple iPhones and Apple iPads. 

Apple's Nine-Month Performance

For the first nine months of the fiscal year ending in late September, Apple has realized revenue growth of 78.2% to $79.979 billion and eps growth of 96.3% to $20.63. Considering the continuing "share creep" in the fully diluted share count, the company's eps performance over this nine-month period becomes even more impressive as the numbers are analyzed. 

Rising Net Income As A Percentage Of Revenue

Underpinning the exceptional rates of eps growth is the rising percentage of each revenue dollar that flows to the company's net income line. The graph below illustrates the growth in net income relative to revenue over the most recent eleven fiscal quarters. 

Apple's PEG Ratio Signals Share Price Gains Ahead

On Friday, Apple (AAPL) closed New York trading at 343.26, up $7.59 on the day and up  $16.91 or 5.2% on the week. Although the week's share price advance was impressive, Apple remains significantly under valued based on the company's current rates of revenue and earnings growth. In the first six months of the current fiscal year Apple's revenue has risen 76.2% and earnings per share has gained 83.2%. In contrast, since the first trading of Apple's current fiscal year on September 27, 2010, the share price has responded with only a 17.9% gain.

Last week in a post titled AAPL: The Coiled Spring I compared the median price targets for three popular equities: Amazon, Apple and Netflix and the share prices for each of these companies. Apple is trading at a price-earnings multiple of 16.35 times trailing 12-month earnings of $20.99 per share and at only 76.3% of the median Wall Street price target of $450 per share. In comparison, both Amazon and Netflix are trading at much higher price earnings multiples and at or near their respective median price targets.

Apple's PEG Ratio: More Share Price Gains Ahead

For today's post I asked Jeff Fosberg of the Apple Finance Board to adapt his popular "coiled spring" graphic to reflect not the price-earnings multiples of the above-referenced companies but the PEG ratios of the companies at Friday's closing prices. 

Simply defined, the PEG ratio represents the price-earnings multiple divided by earnings per share growth. The lower the PEG ratio, the lower the current valuation relative to rates of earnings growth. Apple's current PEG ratio is 0.63 versus 2.92 for Amazon and 1.98 for Netflix. Compared to high-flying stocks such as Amazon and Netflix, Apple is bargain priced and the company's current PEG ratio signals more share price gains ahead. Because Amazon, Apple and Netflix operate in different product and service markets, the PEG ratio is a more effective way to compare and contrast the current market valuations of the three popular equities than a comparison of price-earnings multiples alone. This comparison accentuates the deep discount to growth at which Apple currently trades.  

AAPL: The Coiled Spring

On Friday AAPL closed New York trading at $326.35, down $4.88 on the day. At that price Apple is trading at a price-earnings multiple of 15.55 times trailing 12-month earnings of $20.99 per share. This lowly valuation includes more than $70 per share in cash on Apple's balance sheet and is in the context of an earnings per share growth rate of 83.2% in the first six months of the current fiscal year. 

On June 12th I published my updated 12-month price target for AAPL of $590 per share.  At Friday's closing price of $326.35 a $590 target price might seem ambitious. It's an anticipated 80% rise in the share price in roughly 12 months. But as I will detail in this article, AAPL is trading not only at a low historical p/e multiple since the elimination of deferred revenue accounting on the iPhone in FQ1 2010, but is also trading significantly below the current price targets of the Wall Street pros. 

AAPL: The Coiled Spring

For this article I asked Jeff Fosberg of the Apple Finance Board to update his popular "coiled spring" graphic to reflect Friday's closing prices for three popular publicly traded enterprises: Amazon, Apple and Netflix. The graphic compares the valuations of the three companies based on current price-earnings multiples and the gap between the current median price target from Wall Street analysts and Friday's closing prices.

I do not view price-earnings multiples as an effective means to compare companies in dissimilar industries. Amazon, Apple and Netflix do not compete directly in their respective core markets and Apple's hardware products are revenue conduits for products and services offered by Amazon and Netflix. The markets for the Amazon Kindle and the Apple iPad only partially overlap. However, comparing the gap between current trading prices and Wall Street price targets makes for a compelling contrast between the valuations of the three companies.

No matter the 82.3% rise in eps in the first six months of Apple's current fiscal year, the average estimate among analysts calls for eps in FY2011 (ending in late September) of $24.76 versus $15.15 in FY2010, a gain of 63.4% with less than six months remaining in the one-year period. For FY2012 the current average eps estimate of $28.72 represents only a 16% gain above the estimated current fiscal year eps performance. 

FY 2012 Analyst Estimates: Why AAPL Is Set To Pop

On September 11, 2010 I published a post titled FY2011 Analyst Estimates: Why AAPL Is Set To Pop. At the time the post was published AAPL had ended the week's trading at $263.41. Seven months later and with AAPL closing on Friday at $335.06, the share price is poised to again move higher and more than surpass the all-time trading high of $364.90 set on February 16, 2011.

Analyst FY 2011 Estimates

At Friday's closing price of $335.06 and a price-earnings multiple of 18.69 times trailing 12-month earnings per share, AAPL is trading at a deep discount to the company's 67% rate of eps growth in FY 2010 and the December quarter's eps growth rate of 75.2%. The current Wall Street consensus for the March quarter is revenue of $23.18 billion and eps of $5.33 per share or an eps growth rate of 60%. For FY 2011, ending in September, analysts are expecting revenue of $100.43 billion or about 54% revenue growth and eps of $22.97 or  eps growth of about 51.2%. Both estimates are well below current rates of growth. In the December quarter revenue rose 70.5% and eps 75.2%. But the disconnect between the analyst consensus and the company's current rates of growth become even more dramatic for fiscal year 2012 that begins in late September. 

FY 2012 Analyst Estimates

Expanding on a comment I made on a recent Apple 2.0 column titled AAPL: What Could Go Wrong?, the Street FY 2012 estimates for AAPL deny reality. The current Wall Street analyst consensus for FY 2012 is revenue of $117.95 billion and eps of $26.51. It's possible (and increasingly probable) Apple will meet or exceed those average estimates this fiscal year. In other words, the Street is forecasting zero revenue and earnings growth for next fiscal year. If Apple's December quarter rates of revenue and eps growth remain consistent, the company will report revenue of $111.20 billion and eps of $26.54 this fiscal year. For the March quarter I estimate revenue growth of  87% and eps growth of just under 90%. For the fiscal year I expect earnings per share of no less than $27. 

To reach the Street's current FY 2012 revenue consensus in FY 2011 revenue would need to rise this fiscal year by about 81%. To reach the FY 2012 eps consensus in FY 2011, eps would need to rise this fiscal year about 75% or about the same rate of eps growth reported in the December quarter.

Apple's Dynamic Revenue Mix

To sustain strong revenue and eps growth over the next eighteen months and through FY 2012, Apple does not need to release additional new products. In the recent December quarter (and according to my estimates again in the March quarter), iPhone revenue growth exceeded total revenue from iPad sales activity. The company's existing product lines (now including the Apple iPad) already provide a strong foundation for revenue and earnings growth for at least the next eighteen months. 

iPad revenue will surpass the revenue generated from Macintosh unit sales in the current June quarter, positioning the iPad as Apple's second highest revenue generator behind only the iPhone. The expanded domestic iPhone distribution that now includes Verizon network subscribers and the expected expansion of iPhone distribution in China sometime prior to the start of FY 2012 will sustain high rates of iPhone unit sales growth through the next fiscal year. The global market for the Apple iPad is in its early stages of development and iPad unit sales growth will also support strong revenue growth for the next several quarters. These factors alone suggest FY 2012 revenue of at least $165 billion and eps of at least $40, well above current Wall Street analyst estimates.

AAPL 12-Month Price Targets

AAPL 12-Month Price Targets

On February 1st I posted a five-quarter review of Apple's price-earnings multiples with and without the company's burgeoning cash balances factored into the share price valuations. Over a one-year period ended on February 1st, Apple's share price rose 77% against a 75% rise in reported earnings per share.

Looking forward 12 months to February 1, 2012, I anticipate about a 70% rise in Apple's share price to $590. This is based on an expectation of a continuing rise in quarterly earnings per share at a pace close to the 75% realized in the December quarter for the balance of FY2011 with strong eps growth continuing through FY2012. 

The dates chosen for the quarterly price targets represent the first trading day of the month following the release of Apple's quarterly earnings reports, providing time for the markets to adjust the company's valuation based on the the most recent quarterly numbers. 

The graph below illustrates the growth in Apple's share price over the past four quarters and my quarterly target prices for the next 12 months. The table data provides a delineation of the share price changes over the past four quarters and the share price changes projected in my estimates. 

				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		405	17.38%	Projected
	8/1/11		454	12.10%	Projected
	11/1/11		519	14.32%	Projected
	2/1/12		590	13.68%	Projected

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.