AAPL PE and Consumer Confidence Index

  • Posted: 30 January 2011 02:13 PM

    In another topic we have been discussing the difference between the fair value of AAPL and twelve month target prices.  IMO, the difference between these two is mostly due to fluctuations in investor sentiment.  In a bearish climate like we have now, PEs are going to be compressed. 

    I’m surprised by how many members on AFB take it on faith that AAPL’s PE, now under 20, will not return soon, if ever, to the 30s and even 40s of just a few years ago.  For ye of little faith take a look at this chart of consumer sentiment:


    You will notice that while consumer sentiment has improved since last year, it is still at nearly its lowest point in 35 years.  Does anyone here really think that consumer sentiment won’t revert back to its mean?  Look at the chart again and you will see that in each of the recessions of the last 35 years, consumer sentiment started to rebound within about four years of its initial drop, and returned to its mean within five years of its initial drop.

    Now here’s the kicker:  if you were to chart AAPL’s PE for the last five years, it would precisely mirror this sentiment index.  Perhaps Horace or somebody facile with charts can do this for us, but I did it by hand with a slightly larger scale for PE than for the index and it was hand-in-glove. 

    IMO, when sentiment reverts to its mean sometime in the next two years, AAPL will return to a PE of 30.

    Until then, I will keep predicting a higher fair value than my prediction of a target price, which needs to be discounted for bearish sentiment.

  • Posted: 30 January 2011 03:04 PM #1

    I think if one were to create a model that would help explain some of the variance in AAPL, it would probably be a multivariate model.

  • Posted: 30 January 2011 03:12 PM #2

    adamthompson3232 - 30 January 2011 06:51 PM

    While I find this correlation very interesting, I cannot see any reason to believe there is a causal relationship here. If there was a causal relationship why wouldn’t all PE ratios be compressed when investor sentiment is low? The S&P is not trading at extremely low PE levels and I don’t see any reason for AAPL to be causally effected by low consumer confidence when other stocks largely are not, or at least not anywhere close to the same degree as AAPL.

    Primarily, the reason it impacts AAPL more than the S&P is that AAPL is considered a more high risk/high reward stock. Just its once lofty PE itself vs the S&P is going to make AAPL more susceptible to the slings and arrows of sentiment.  Consumer electronics is rife with companies that quickly fell from grace.  See Sony.  See Microsoft.  Heck, see Apple itself in the mid 90’s.  When sentiment turns bearish, these old wounds are magnified.

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    Posted: 30 January 2011 09:02 PM #3

    Sorry, I can’t agree.  Gut feeling, but this stupid Law of Large Numbers? that keeps getting thrown around will inevitably keep dampening Apple’s P/E ratio.

    How big can Apple get?  $150 billion (by next year, sure)?  $200 billion?  $250 billion? 

    I’ll be honest, I have my doubts that Apple, exemplary as it is, can become the World’s Largest Company by Revenue (title currently held by Wal-Mart at around $410B per Wikipedia as of Jan 2010) as presently constituted.  I’m not sure the Grand Experiment of Outsourcing Production has ever been done on as massive a scale as Apple.

    I’m hoping the “Summer of AAPL”, as I like to call it on account of my ego, will see a P/E of 25 (which would be higher than in 2010) within the next 2 years.  But I have my doubts.


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

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    Posted: 30 January 2011 09:47 PM #4

    Interesting theses but I’m going to way in (JMO) as follows:

    Apple’s recent slide in PE is primarily due to the Cap size and perceived fragility/disbelief in Apple’s future income growth capability. That perception has been hardly addressed by Apple in any meaningful way. In fact, the management has gone out of its way to obfuscate the near term income growth. Additionally, the mountain of cash is actually becoming a liability to WS as it just reinforces the contrarian nature of Apple’s management. 

    I see the PE further compressing over the near and long term. It won’t be long before we’ll be pinning for those ‘good old days’ when Apple had a trailing PE of 20. The good news is that even at a trailing PE of ~18 ish there’s plenty of room to grow aapl over the next couple of years.


  • Posted: 31 January 2011 12:46 AM #5

    Nice work, MacOrange.

    Without question this is worth watching.

  • Posted: 06 May 2011 08:31 PM #6

    Just to update my original post, since February, as the price of AAPL has remained flat, the Michigan Consumer Sentiment Index fell from 78 to 69, back to where it was at the end of the recession and still almost 20 points under average.  The last time the Index fell was in mid 2010 mirroring precisely the last time AAPL was flat.  When the Index rose significantly in the last calendar quarter, AAPL stock rose in parallel.

    Fear is fear.  Period.  Don’t try to single out any particular reason (like SJ health, Android, component shortages, etc).  When fear predominates, fear FINDS a reason to avoid risky investments.  AAPL is viewed as a risky stock because it’s in the consumer electronics business, which is a trendy, cutthroat industry. 

    When consumer sentiment improves, AAPL will rise.  Maybe I’m wrong, but let’s just say that until the consumer sentiment Index and AAPL diverge, I’m sticking to my theory.

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    Posted: 06 May 2011 09:06 PM #7

    Great idea and agree that p/e and consumer sentiment are correlated for Apple.  Maybe Deagol or Aysmco would build some charts .  here is a source for consumer data

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    Posted: 06 May 2011 11:21 PM #8

    pats - 07 May 2011 12:06 AM

    Great idea and agree that p/e and consumer sentiment are correlated for Apple.  Maybe Deagol or Aysmco would build some charts .  here is a source for consumer data

    I agree.  Further more we should look at investor or WS sentiment as well and see if there is any correlation.