Apple’s P/E Multiple With And Without Cash In The Valuation

  • Posted: 02 February 2011 02:00 AM

    A quick comparison of Apple’s p/e multiples with and without cash on dates that followed the release of quarterly earnings reports.

    Snippet: No matter the 77% rise in the share price between February 1, 2010 and today, the share price appreciation has essentially only kept pace with the 75% gain in 12-month trailing earnings per share. The sans cash share price has risen 85% since February 1, 2010 yet the cash adjusted p/e multiple remains well within the recent historical range. At today’s closing price of $345.03, AAPL remains moderately priced based on a comparison of the five quarterly dates selected. The shares are positioned for at least modest appreciation over the next few weeks and prior to the expected run-up of the share price in anticipation of March quarter results.

         
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    Posted: 02 February 2011 02:23 AM #1

    As it has always been, cash is king for Apple, but meaningless to investors (as far as share price ceilings are concerned).

    This is one of the last two years that AAPL has a chance to go “nova” - modestly - on a P/E basis.  We are very unlikely to see such stupefying rates of growth ever again.

    Here’s hoping the Summer of AAPL gets halfway close to its potential (P/E of 23 or better).  Of course it all depends on what iPad 2 and iPhone 5 can do to sway investor sentiment this year.  A few more quarters of blockbuster iOS growth should help.

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    Thanks, Steve.

         
  • Posted: 02 February 2011 03:06 AM #2

    Mav - 02 February 2011 06:23 AM

    As it has always been, cash is king for Apple, but meaningless to investors (as far as share price ceilings are concerned).

    This is one of the last two years that AAPL has a chance to go “nova” - modestly - on a P/E basis.  We are very unlikely to see such stupefying rates of growth ever again.

    Here’s hoping the Summer of AAPL gets halfway close to its potential (P/E of 23 or better).  Of course it all depends on what iPad 2 and iPhone 5 can do to sway investor sentiment this year.  A few more quarters of blockbuster iOS growth should help.

    Investors do not buy an equity because of its PE (or as I prefer to refer to it: Investor Sentiment Multiplier).

    PEs (ISMs) are neither good nor bad.  They are what they are, period.  The market is irrational, and no matter what the ‘professionals’ say, cares not a wit about PE ratios, Implied Volatility, or any other buzz word measurement of value.  How else can you explain the vagaries in PE between any other low growth equities, (such as AMZN with a “PE” ~62) and AAPL at ~19?

    The concept that “PEs” (ISMs) should be this, or that, because of some rule is flawed.  That’s why I prefer the label ISM (Investor Sentiment Multiplier).  There are no ‘rules’ governing Sentiment, it is what it is, and that’s all there is to it.  That would appear to be irrational.  It is (refer to statement above regarding market irrationality).

    This is why I track AAPL’s intraday HIGH and LOW.  Opening price and closing price have no meaning.  AAPL’s value is not expressed at an arbitrary point, it is somewhere between the Open, and the Close (intraday HIGH and LOW).  The value of AAPL is determined by and between a ready, willing and able buyer and seller (which changes with every trade, based on the needs/assessments of the involved buyer and seller).

    AAPL has increased in value by ~80% in the past year.  That all of that gain came from increases in earnings, and not “PE”, matters not to investors.  If AAPL grows another 80% this year, in the same way it did this past year (no change in “PE” (ISM), investors won’t care that it was driven exclusively by increases in earnings.  All they see is the 80% gain, and they are quite happy with that (what other investments do they have doing as well?).

    If, and only if, investors see something that changes their long range sentiment toward AAPL upward, will we see AAPL trading even higher than it already is (80% YoY), and not until then (and I won’t lament AAPL’s apparent low “PE” (ISM).  I have no idea what that something will be, but in the meantime, I will continue to invest in AAPL, taking advantage of what I, as an individual, see as extreme buying opportunities (80% YoY growth is OK with me as well).

    Of course, I only trade in AAPL options so my portfolio is growing at a multiple of that 80% (closer to 1000% than 80%).

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    Posted: 02 February 2011 03:22 AM #3

    P/E is simply a metric, we agree.  It’s just one amateur’s opinion, but I see some extra meaning - and advantage - in that metric.  Apple’s P/E is rational in an irrational sense (i.e. it trades in a somewhat predictable band), so goes my investment thesis for this year.  We’ll see where it gets me.

    But what do I know.  Anyway, best of luck to us all.

    [ Edited: 02 February 2011 03:27 AM by Mav ]

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.

         
  • Posted: 02 February 2011 03:49 AM #4

    Mav - 02 February 2011 07:22 AM

    P/E is simply a metric, we agree.  It’s just one amateur’s opinion, but I see some extra meaning - and advantage - in that metric.  Apple’s P/E is rational in an irrational sense (i.e. it trades in a somewhat predictable band), so goes my investment thesis for this year.  We’ll see where it gets me.

    But what do I know.  Anyway, best of luck to us all.

    Apple’s share price advance has moved in step with the rise in eps. From a valuation standpoint it indicates the share price has not moved ahead of earnings growth nor is it trading in anticipation of a growth rate greater than what’s been realized over the past year. The impact of this is that it supports many of the share price forecasts presented by AFB members for the index to be published soon after the 15th.

    I expect Apple’s p/e multiple to remain fairly consistent over the next year, similar to the way it has remained fairly consistent over the past year with the share price continuing to rise more or less in step with the growth in eps.

    Comparing p/e multiples of companies in different industries (for example the frequent comparison of AMZN to AAPL) is a classic mistake and one made all too often.

    The numbers indicate that despite the rise in the share price over the past year, the valuation remains moderate (even modest by some measures), suggesting a continuing rise in the share value as eps growth continues at a pace of 70%+ for the next few fiscal quarters.

         
  • Posted: 02 February 2011 03:59 AM #5

    adamthompson3232 - 02 February 2011 06:19 AM

    It just boggles my mind that after each and every mind blowing quarter sentiment doesn’t get more and more positive (ie. P/E multiple expansion).

    at, at this point in time and considering the 70%+ eps growth rate expected over the next few quarters, consistency is more of what matters than an expansion of the nominal p/e multiple itself.

         
  • Posted: 02 February 2011 04:03 AM #6

    Mav - 02 February 2011 07:22 AM

    P/E is simply a metric, we agree.  It’s just one amateur’s opinion, but I see some extra meaning - and advantage - in that metric.  Apple’s P/E is rational in an irrational sense (i.e. it trades in a somewhat predictable band), so goes my investment thesis for this year.  We’ll see where it gets me.

    But what do I know.  I don’t have the moneybags.  Anyway, best of luck to us all.

    I didn’t either when I first started trading AAPL options nearly 7 years ago (late 2004).

    Just out of bankruptcy, I started with $500.  I knew nothing about options, or Apple, and it took me until 2006 to make a profit.  I continued my education and now do very well indeed.  It didn’t come easy, it came with an almost fanatical commitment (my friends’ description) to learn what I know today.

    During that journey I discarded a lot of what WS believes/preaches, and substituted what I had observed, and seemed to make more sense in an irrational world.  The result was that I stopped trying to figure out why the “market” did this or that.  The reality is that nobody knows, ESPECIALLY the talking heads on CNBC (I no longer watch it).

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    Posted: 02 February 2011 04:35 AM #7

    Gregg Thurman - 02 February 2011 08:03 AM

    ... The result was that I stopped trying to figure out why the “market” did this or that.  The reality is that nobody knows, ESPECIALLY the talking heads on CNBC (I no longer watch it).

    Are you here when I say assigning reasons/news to market behavior is like “The seven blind men and the elephant”?  Frankly, I like your tenacity and boldness, from $500 to multi-million dollars in under five years.  You and snipus are motivations for me to remain in the option trading game.  So far, I’m behaving like a sissy (no offense, alice and sassy), didn’t make much from option trading, I mean big absolute $, big % is easy.  The size of your bet is scarily big.

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  • Posted: 02 February 2011 11:25 AM #8

    The data reveals a certain consistency in the valuation of AAPL over the past year and tracks with the rise in eps. This suggests we may not see a dramatic expansion in the p/e multiple over the next year but the share should continue to rise in concert with earnings growth.

    Again, I expect $600 per share by around this time next year.

         
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    Posted: 02 February 2011 01:15 PM #9

    Another point to keep in mind regards AAPL’s PEs - while most of us don’t expect it to rise much above it’s top end of the last 12 months, I also don’t expect it to drop much below it’s low end of that range. While eps will do it’s share to support that, I also think that the plethora of IPOs coming this year - Facebook, LinkedIn, GroupOn, etc., will have valuations that will make NFLX look cheap - given that environment, it could provide help keep the PE range intact while eps continues to move the stock higher.

         
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    Posted: 02 February 2011 02:13 PM #10

    Robert - Thanks for the blog post, may I join Adam in some well-deserved laudation.

    Gregg - I liked your ISM theory when you first explained it. Please keep spreading the mantra. Your story is also inspirational to many of us.

    AHHA - Good point on the tech sector getting hot. With all the fear that’s going around, we shouldn’t forget about greed.

         
  • Posted: 02 February 2011 05:19 PM #11

    AHHA - 02 February 2011 05:15 PM

    Another point to keep in mind regards AAPL’s PEs - while most of us don’t expect it to rise much above it’s top end of the last 12 months, I also don’t expect it to drop much below it’s low end of that range. While eps will do it’s share to support that, I also think that the plethora of IPOs coming this year - Facebook, LinkedIn, GroupOn, etc., will have valuations that will make NFLX look cheap - given that environment, it could provide help keep the PE range intact while eps continues to move the stock higher.

    I don’t expect the nominal p/e multiple to contract appreciably from where it is today. The issue is one of forecasting near-term price movements when the multiple reaches close to the top of the recent trading range. I’m not forecasting the share price sustaining a valuation above 22 times 12-month trailing earnings.

    However, within the recent valuation range there’s plenty of room for share price appreciation as earnings continue to rise.

         
  • Posted: 02 February 2011 05:45 PM #12

    I don?t expect the nominal p/e multiple to contract appreciably from where it is today. The issue is one of forecasting near-term price movements when the multiple reaches close to the top of the recent trading range. I?m not forecasting the share price sustaining a valuation above 22 times 12-month trailing earnings.

    However, within the recent valuation range there?s plenty of room for share price appreciation as earnings continue to rise.

    Agreed DT…. as for me, I value APPL by considering its growth will get “normal” with a p/e multiple of 10 in 4-5 years with an eps about $100, a $50 yearly dividend and AAPL at $1000.
    buying AAPL under $400 is by far the best long term secure investment.

    [ Edited: 02 February 2011 05:47 PM by Hamourabi ]      
  • Posted: 03 February 2011 12:28 AM #13

    Hamourabi - 02 February 2011 09:45 PM

    I don?t expect the nominal p/e multiple to contract appreciably from where it is today. The issue is one of forecasting near-term price movements when the multiple reaches close to the top of the recent trading range. I?m not forecasting the share price sustaining a valuation above 22 times 12-month trailing earnings.

    However, within the recent valuation range there?s plenty of room for share price appreciation as earnings continue to rise.

    Agreed DT…. as for me, I value APPL by considering its growth will get “normal” with a p/e multiple of 10 in 4-5 years with an eps about $100, a $50 yearly dividend and AAPL at $1000.
    buying AAPL under $400 is by far the best long term secure investment.

    I’m looking at $37 or better in eps in FY2012. I do expect the share price to double from today’s closing price within 21 months with or without an expansion in the nominal p/e multiple.  grin

         
  • Posted: 05 February 2011 12:22 AM #14

    One last post before moving on to my next Eventide topic.

    Earnings will drive the share price higher no matter the p/e multiple awarded by the market. The shares are on track to double in value within 21 months. We shouldn’t lose track of the long-term value in these shares in the day-to-day movements in the share price.

         
  • Posted: 13 February 2011 03:04 PM #15

    DawnTreader - 02 February 2011 06:00 AM

    A quick comparison of Apple’s p/e multiples with and without cash on dates that followed the release of quarterly earnings reports.

    Snippet: No matter the 77% rise in the share price between February 1, 2010 and today, the share price appreciation has essentially only kept pace with the 75% gain in 12-month trailing earnings per share. The sans cash share price has risen 85% since February 1, 2010 yet the cash adjusted p/e multiple remains well within the recent historical range. At today’s closing price of $345.03, AAPL remains moderately priced based on a comparison of the five quarterly dates selected. The shares are positioned for at least modest appreciation over the next few weeks and prior to the expected run-up of the share price in anticipation of March quarter results.

    Apple is building cash while increasing profits. I don’t see a high risk of p/e compression over the next year.