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 Price Target: $790 Per Share

Today, I am publishing an updated price target for Apple of $790 per share. This target forecasts a 60% gain in the share price from the closing price of $493.42 on Friday, February 10, 2012. I consider this price target to be moderate based on the expectations of strong revenue and earnings growth over the next 12 months and the low valuation range in which the shares currently trade, despite the recent run-up in price. 

Over the past 10 trading days, the shares have risen about 10% from the closing price of $447.28 on January 27th to Friday's closing price of $493.42. However, this recent gain is a market response to Apple's strong December quarter outcome and does not represent a new valuation range for the shares. The shares continue to trade at a significant discount to near-term growth. 

Apple's Current Valuation

The graph below illustrates, despite the near 100% growth in earnings per share over the most recent four fiscal quarters, at Friday's closing price the shares have risen only 43% in value since February 1, 2011. 

Over the past 12 months the company's cash and marketable securities per share has continued to rise as a percentage of the share price. At Friday's closing price, cash and marketable securities per share represented 21% of the share price.  

Apple's Monster Quarter And The Pending Share Price Advance

Apple is unique among America's mega caps due to the company's ongoing rates of revenue and earnings growth. From $108.25 billion in revenue reported in the fiscal year ended in September, Apple will surpass $170 billion in revenue this fiscal year and reach over one-quarter trillion dollars in revenue in FY2013. At a current market cap of $375 billion, the shares trade at about 14.5 times trailing twelve month earnings of $27.68 per share and at about 8.75 times my projected FY2012 earnings of $46 per share.

Because of the company's frenetic rates of revenue and earnings growth, Apple is in an equity class all its own. Apple will deliver a third consecutive fiscal year of revenue growth above 50% and eps growth above 60%. This fiscal year's strong performance begins with what I call "Apple's monster quarter."

Apple's Monster Quarter

Apple's first fiscal quarter of FY2012 will be fourteen weeks in length. It stretches from September 25, 2011 to December 31, 2011. The additional week in the quarter will encompass the immediate post-Christmas period. The quarter also includes the initial release of the iPhone 4S in the United States and other launch countries. The additional shipping week, the new Sprint agreement for the iPhone and pent-up demand for the recently refreshed smartphone handset will deliver revenue growth greater that 60% in the quarter and eps growth exceeding 80%. 

AAPL's Discount To Current And Future Growth
The chart below illustrates how much the rate of Apple's share price appreciation has fallen behind the rate of earnings growth over the past four quarters. Despite the 82.7% growth in earnings per share in FY2011, at Apple's closing price of $403.33 on Friday, December 23rd, the share price has risen only 24.64% year-over-year. The dates selected for the charts in this article represent the first trading day of the month following the release of quarterly earnings and the closing price on Friday, December 23, 2011.

Apple's Ghost Of Christmas Yet To Come

In the famous novel by Charles Dickens, Ebenezer Scrooge is visited on the night before Christmas by Ghosts of Christmas Past, Present and Yet To Come. The story, which has endured many popular adaptations, ends with the conversion of a miserly and miserable man to a gentleman who carries with him the hopeful and generous spirit of Christmas to the end of his years.

I have followed Apple since the release of the original Macintosh in early 1984. I have witnessed and written about the tragedies and triumphs of the company's past, its present and Apple's potential for growth in the years yet to come. Today I see a storied enterprise with a colorful past befitting its own novel, yet an enterprise that maintains a youthful, almost playful approach to the product strategies that will yield success in those years yet to come.

Apple's Ghost of Christmas Past

I remember a time when the word "beleaguered" had become a de facto prefix to the company's corporate name. The company that many consider the first modern tech industry IPO and the company that claims to have ignited the personal computer revolution became stodgy and stubborn like the character in the Charles Dickens novel.

In the mid-1990's Apple didn't lose its leadership in the PC market because Windows PCs were better. Apple lost its leadership because the CEO at the time bet on the brand name rather than innovation to deliver revenue and margins. The Performa line of Macintosh computers nearly drove the company to oblivion.

It was a twist of fate and a combination of products for content creation and content consumption that reversed Apple's fortunes. The return of Steve Jobs, the nimble and diminutive iPod, the iTunes music store and a revamped line of personal computers sparked one of the great corporate revival stories of the past one hundred years. It was innovative thinking that started Apple and it's the continued spirit of innovation that recently delivered the company's first $100 billion fiscal year.

Although Apple has invested heavily in building global brand awareness, innovation is delivering record revenue and earnings, not the brand name. Apple has learned from its ghosts of the past.

Apple's Ghost of Christmas Present

For the holiday season of 2011, Apple released a compelling line of new smartphones and the company is a global leader in the emerging market for tablet-style products. This quarter Apple will generate revenue of over $40 billion and earnings of more than $11 per share.

Apple Competes With Device Makers, Not Operating Systems
Contrary to popular opinion, Android handset makers compete more with one another than they compete with Apple. Apple's biggest challenges are maintaining the pace of product innovation and meeting demand with supply when refreshed products are initially released.

Absent innovation Apple can not sustain strong rates of revenue and earnings growth. Only in the absence of adequate supplies of newly released Apple products can competitors establish or sustain a lucrative foothold in any of  the company's primary product markets.

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.