Wednesday, 21 December 2011

Apple: Cheap at 11.4 times 2012 earnings?

Apple @ $395.95, +$13.74 (+3.59%)

Well, strange to say it but, depending upon your outlook for 2012 and any effect on the company's fortunes, Apple is starting to look ridiculously cheap on just 11.4 times 2012 earnings.

This would be dependent upon modest earnings growth of 26%. Modest by Apple standards anyway where growth has ranged between 36% and 82% per annum over the last 5 years. 
So depending upon the company's products and sales retaining some resilience to global recessions, and to gathering rivals in Google/Android/Samsung/HTC/Nokia/Microsoft/RIM et al, 26% growth and 11.4 times earnings suggests quite a bit of caution in the price.

There are heaps of pressures not least of which are the hordes of Google Android products, and 4th quarter results disappointed despite a 28% increase.
Globally, the technology supply chain has also come under pressure this year with natural disasters in Japan and Thailand hitting the supply of key components with Intel the latest company to warn of sales being restricted by supply.

However, that being the case then investors in ARM and Imagination Technology should be more than a little concerned with forecast P/E's of 51.5 times (20% growth implied) for ARM and 49.7 times (-1% growth implied) for Imagination. 
Effectively this reads that if these companies were to channel all of their profits into dividends it would take 51.5, and 49.7 years for shareholders to receive a return equivalent to their original investment. Assuming that the company's profits remain flat and that the share price doesn't appreciate (or fall) of course. 
So both companies need to maintain significant growth in earnings for the next few years at least just to maintain their current share price and for earnings to bring the rating back to a more reasonable level.
Strangely, the fortunes of both companies are now heavily entwined with the growth in mobile computing/smartphones, so their valuations do seem massively disproportionate when compared to Apple which is effectively creating the markets for their products (Apple along with Intel are significant shareholders in Imagination).

Back to Apple then, which on any recent measure, looks ridiculously cheap. Its first quarter results should benefit from christmas and an extra week in the period so depending upon supplies it could add an impetus to the share price when the numbers are reported.

Earlier posts:
- Shares update: Apple's third quarter results.
- Apple 2nd quarter update - profits up 95%!
- Apple update: Ipad 2!   
- Is Android a reason to invest in Google?
- Globally Diversified Technology, Growth, and Hedge portfolio!!!

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