P/E Compression:  Who cares longer term?

  • Posted: 24 May 2011 10:48 PM

    Among the many here who are discouraged to watch AAPL trade closer to a utility stock than a growth stock, I thought I would create a chart to see what AAPL valuation might look like through June 2012, starting from today ($332).

    Even if the P/E compresses to 14—and that’s my floor given Apple’s EPS growth rate—AAPL should find itself well above $500 a year from now.  I’ve assumed a forward growth rate of 65% through June 2012 given the upside from iPhones, iPads and Macs.  If Apple retains a P/E of 15.8 a year from now, Apple can vault $600.

    The question remains:  When does everyone begin treating AAPL like an opportunity to grow true wealth rather than a stock that produces reliable weekly option premiums by those writing them?  In other words, the Apple’s EPS will overcome the sleepy P/E it currently has if one’s time horizon is longer than a month. 

    If only we could predict when AAPL starts making the climb north; it’s clear that it won’t happen with the linearity depicted in the chart.  Could WWDC be the first among future catalysts to restart AAPL valuation?  We have three huge catalysts in formation:  1. WWDC 2.  Q3 2011 Earnings and 3. iPhone 5.  Here’s the chart:

         
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    Posted: 24 May 2011 11:51 PM #1

    Careful.  In Up is Down World, WWDC may not be an immediate catalyst on account of “delays” in iOS 5, and possibly the next iPhone as well.

    Very nice graph, btw.

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  • Posted: 25 May 2011 12:17 AM #2

    Due to the current rates of revenue and eps growth (and anticipated eps growth rates in FY 2012), I don’t rely on the p/e multiple anything but an historical basis for determining trading ranges.

    The p/e multiple is nothing more than a valuation snapshot at a given moment in time based on one metric.

         
  • Posted: 25 May 2011 01:59 AM #3

    Mav - 25 May 2011 02:51 AM

    Careful.  In Up is Down World, WWDC may not be an immediate catalyst on account of “delays” in iOS 5, and possibly the next iPhone as well.

    Very nice graph, btw.

    The order of catalysts was not accidental:  I think the iPhone 5 happens after Q3 2011 earnings call in July, mostly in August.  Stretching the roadmap further, we have Sept. for new iPods. Then, Q4 2012 earnings in Oct.  One catalyst a month, starting in June.  May 2011 was a complete bust.

         
  • Posted: 25 May 2011 02:06 AM #4

    DawnTreader - 25 May 2011 03:17 AM

    Due to the current rates of revenue and eps growth (and anticipated eps growth rates in FY 2012), I don’t rely on the p/e multiple anything but an historical basis for determining trading ranges.

    The p/e multiple is nothing more than a valuation snapshot at a given moment in time based on one metric.

    If there’s no linkage between valuation and P/E, then why bother using P/E at all?  Certainly, in this day and age of NFLX and AMZN, stock valuation needs a new pricing metric.  P/E is broken.

         
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    Posted: 25 May 2011 02:13 AM #5

    What I was saying is there’s always that chance WS could take a “boring” WWDC with “expected incremental changes” in Lion and “unimpressive” iOS 5, without an iPhone announcement (therefore “confirming” the September-or-later rumors), and spin everything as negatives (so that WWDC might not be a catalyst at all).

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

         
  • Posted: 25 May 2011 02:18 AM #6

    Mercel - 25 May 2011 05:06 AM
    DawnTreader - 25 May 2011 03:17 AM

    Due to the current rates of revenue and eps growth (and anticipated eps growth rates in FY 2012), I don’t rely on the p/e multiple anything but an historical basis for determining trading ranges.

    The p/e multiple is nothing more than a valuation snapshot at a given moment in time based on one metric.

    If there’s no linkage between valuation and P/E, then why bother using P/E at all?  Certainly, in this day and age of NFLX and AMZN, stock valuation needs a new pricing metric.  P/E is broken.

    I use the p/e multiple as one metric and gauge and certainly not to compare companies in dissimilar industries. I do use p/e to provide an historical basis for valuation ranges.

    But the market has never had a mega cap on its hands with Apple’s eps growth rate and cash balances of over $60 billion and no long-term debt.

         
  • Posted: 25 May 2011 02:23 AM #7

    Mav - 25 May 2011 05:13 AM

    What I was saying is there’s always that chance WS could take a “boring” WWDC with “expected incremental changes” in Lion and “unimpressive” iOS 5, without an iPhone announcement (therefore “confirming” the September-or-later rumors), and spin everything as negatives (so that WWDC might not be a catalyst at all).

    Which begs the question:  Why is WS trying so hard to spin Apple toward the negative given all the positives?  We’re getting close to the point where there has to be more effort (and more risk) driving Apple lower than letting the fundamentals take it higher.

         
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    Posted: 25 May 2011 02:26 AM #8

    We’ve been there for a while, really, with AAPL’s P/E going from about 20 in January to 16 now.  Of course valuation is meaningless, but the sentiment (or controlled climate) vs. reality disconnect is the size of the friggin’ Marianas Trench. 

    Apple’s future has never been brighter, and coverage is still so negative from so many places (well, not uniformly, but you know what I mean).  It’s a real puzzler.  So what, now the “butterfly” subculture of WS, or whoever it is that makes money by try to “pin” AAPL shares is in the driver’s seat?  It’s a temporary situation, but one the SEC in its selective overzealousness should be looking into.

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

         
  • Posted: 25 May 2011 02:33 AM #9

    Mav - 25 May 2011 05:26 AM

    Apple’s future has never been brighter, and coverage is still so negative from so many places (well, not uniformly, but you know what I mean).  It’s a real puzzler.  So what, now the “butterfly” subculture of WS, or whoever it is that makes money by try to “pin” AAPL shares is in the driver’s seat?  It’s a temporary situation, but one the SEC in its selective overzealousness should be looking into.

    You are trusting that the current SEC is a different one that investigated Madoff.  rolleyes

         
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    Posted: 25 May 2011 02:45 AM #10

    Not sure what you mean.  I haven’t had a high opinion of porn-watching SEC for a while now.  Options backdating tempest in a teapot (a ton of difference that makes these days - 2006); Uptick Rule go bye-bye (2007); Steve Jobs’ health issues (2009).

    Oh, and Madoff.  IIRC, the Madoff deal spans years and presidential administrations.  Then there’s those mysterious hedge funds. 

    So not a political statement (I’m not really into those, particularly in these kinds of settings), rather a statement of no real confidence in this lazy, distracted watchdog.

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

         
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    Posted: 25 May 2011 12:02 PM #11

    Mercel - 25 May 2011 05:23 AM
    Mav - 25 May 2011 05:13 AM

    What I was saying is there’s always that chance WS could take a “boring” WWDC with “expected incremental changes” in Lion and “unimpressive” iOS 5, without an iPhone announcement (therefore “confirming” the September-or-later rumors), and spin everything as negatives (so that WWDC might not be a catalyst at all).

    Which begs the question:  Why is WS trying so hard to spin Apple toward the negative given all the positives?  We’re getting close to the point where there has to be more effort (and more risk) driving Apple lower than letting the fundamentals take it higher.

    Exactly, seems to me that the big boys could make a lot more riding it up then sitting on it and watching it go sideways. That then gives them a chance to short on various FUD.

    Funny how so many here are willing to accept a 20% drop in P/E in the last 4 months “just because”. If you’re an AAPL bull, the only dialog should be why isn’t AAPL getting the same treatment as other stocks (which are seeing P/E expansion so you can’t use the “it’s the economy stupid” argument).

    just my 1.6 cents.

         
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    Posted: 25 May 2011 12:19 PM #12

    I wish I could find my posts from a year ago.  I have been preaching p/e compression for quite some time.  Not because I think is warranted but because etrade has been telling me so.  I did not think we would get this low at this point.  I thought we would get a 19 which would give us about $400 for price per share.

    The good news is that they don’t foresee a lower then 13 p/e thru the end of 2012.

    There is a direct correlation between size of company and p/e The bigger the market cap the smaller the p/e.

    I hate to say it but I don’t see a higher p/e then 16 for the next 24 to 36 months.  I blame it on two huge factors.  Overall economy and Android.  Only after these two issues get resolved we could see a p/e of 20 again.

         
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    Posted: 25 May 2011 12:41 PM #13

    omacvi - 25 May 2011 03:19 PM

    I wish I could find my posts from a year ago.  I have been preaching p/e compression for quite some time.  Not because I think is warranted but because etrade has been telling me so.  I did not think we would get this low at this point.  I thought we would get a 19 which would give us about $400 for price per share.

    The good news is that they don’t foresee a lower then 13 p/e thru the end of 2012.

    There is a direct correlation between size of company and p/e The bigger the market cap the smaller the p/e.

    I hate to say it but I don’t see a higher p/e then 16 for the next 24 to 36 months.  I blame it on two huge factors.  Overall economy and Android.  Only after these two issues get resolved we could see a p/e of 20 again.

    Again, if it’s the economy then why have we seen P/E expansion from the likes of NFLX, CMG, AMZN, PCLN. I know, big cap, blah blah blah. Hell even Mickey D’s has seen their P/E rise. Just sayin…

         
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    Posted: 25 May 2011 01:13 PM #14

    As sponge pointed out, we debate the p/e issues every few years.  One of the sources I recommend for additional reading is   Crestmont Research

         
  • Posted: 25 May 2011 04:52 PM #15

    ChasMac77 - 25 May 2011 03:02 PM

    Exactly, seems to me that the big boys could make a lot more riding it up then sitting on it and watching it go sideways. That then gives them a chance to short on various FUD.

    Funny how so many here are willing to accept a 20% drop in P/E in the last 4 months “just because”. If you’re an AAPL bull, the only dialog should be why isn’t AAPL getting the same treatment as other stocks (which are seeing P/E expansion so you can’t use the “it’s the economy stupid” argument).

    just my 1.6 cents.

    Agreed.  Accepting a low P/E for a growth stock like Apple is capitulation, or laziness in one’s attempt to find a better explanation to current valuation.