by Dennis Slothower, editor Stealth Stocks
We have added Apple (AAPL)
to our portfolio; at these levels the market is offering us a world
leader for a below-market average P/E of only 10 times trailing 12-month
earnings.
AAPL has a strong balance sheet; shareholder
equity/total assets are at 0.65, meaning that every $1 of assets is
backed by 65 cents of equity. Return on equity over the past 12 months
is more than 38%.
Just a few months ago, AAPL was selling for $705 a share at a P/E of 15.
At that price, it was priced for perfection as the world's largest
corporation and considered to be the world's premier growth company.
We
could argue that the competition from Samsung and Google is getting
tougher, a global slowdown is taking a toll, the loss of Steve Jobs is
being felt or just the combination of all these factors has caused the
slope in profit growth to flatten and Apple has paid the price for it.
Capital
gains taxes going up in 2013 also forced long-term investors to realize
profits before taxes went higher, which also uniquely pressured AAPL at
the end of 2012.
Consequently, after years of spectacular
growth, investors began to sense a few months ago that Apple's profit
growth was flattening out. The stock fell nearly 40% since September,
dropping to $435 on January 25, giving up nearly all its gains for 2012.
Investors
have discounted substantially the probability that Apple's quarterly
profits will be flat on the year at $13.1 billion and that the annual
outcome could be the first decline for a decade. Some are calling this
the start of the demise of Apple.
I am not in that camp. Granted,
Apple's slope of profit growth may be slowing for now, but it still
made $41.7 billion in 2012, which is greater than the total size of the
global music industry. Profits for 4Q12 were 13.1 billion!
It is true they were expecting $13.3 billion in profits, but Apple was discounted nearly 40% for this miss.
However,
rational investors need to ask what is the underlying worth of the
business ... and at what price is the stock a screaming buy?
Apple
has $135 billion of cash and no debt. If we back out the cash, Apple's
business is now valued at $291 billion ($426 billion market cap minus
$135 billion cash = $291 billion).Apple's net income was a little more
than $41 billion for 2012.
Apple's cash on their balance sheet
works out to $323 per share. At the current share price, that would
value Ap- ple's business at only 7 times earnings! It's not every day
that such a dominant company as Apple trades at these valuations.