Depending on the direction of Apple Inc. (NASDAQ:AAPL)‘s stock in the next few months, we may hit a tipping point where the market assigns a value that is unheard of. Based on at least one metric, Apple stock is almost as cheap as one of their struggling competitors. The company’s growth may be slowing, but through share repurchases and dividend increases, management is proving its commitment to shareholders. From now until around June, investors may have a chance to buy Apple Inc. (NASDAQ:AAPL) at these prices. After that, don’t expect to see these prices again.
What did the market expect? One of the main headlines I’ve read about Apple over the last year or so is that growth is slowing. Naive commentators have even said that the stock price dropped because investors had to adjust to this slower growth phase. Here’s the thing, none of that makes sense.
While it’s true Apple Inc. (NASDAQ:AAPL) investors may never see 50% and 60% revenue or earnings growth again, the stock was never priced as such. In fact, at today’s price, Apple carries a forward P/E of under 10, that is cheaper than Microsoft Corporation (NASDAQ:MSFT) at 11.5 times earnings, or Google Inc (NASDAQ:GOOG) at 17.88 times earnings.
Of course the difference is, neither of these companies is expected to grow earnings at the same rate as Apple. Analysts generally expect about 9% growth from Microsoft Corporation (NASDAQ:MSFT), and about 15% from Google Inc (NASDAQ:GOOG). Those same analysts are still calling for 20% growth from Apple Inc. (NASDAQ:AAPL). You’ll see why this is possible in a minute.
When it comes to growth, Apple is going through a transitional period where the iPad will become more important to their overall revenue and earnings. With iPhone unit sales up 6.55%, and revenue up 3%, clearly some customers chose older model iPhones. iPad growth of 65% in units, and 40% in revenue, suggests the iPad Mini took sales from the larger model. It’s the transition from more expensive units to cheaper models that is Apple Inc. (NASDAQ:AAPL)’s future.
4 reasons the stock looks like a steal This transition to cheaper models is actually a good reason for long-term investors to buy the stock. If Apple came out with cheaper models on day one, their margins would never have been as high as they were. However, simple economics would suggest the company release the highest priced models first, capture the most profit, and then over time lower prices to gain market share. Apple is likely to continue to make models more affordable, and a lower margin will be eclipsed by the massive growth in the smartphone and tablet industry.
Make no mistake, the smartphone market is massive. In doing research for this post about RES.IN MOT.DBA BLACKBERRY (FRA:RI1), I found that IDC research expects 918 million smartphones to be sold worldwide in 2013. As of that research, Apple had the 2nd highest global market share at about 14.9%. If IDC is correct, and Apple Inc. (NASDAQ:AAPL) only maintained its current market share, the company would sell 136 million iPhones this year, or about 34 million a quarter. The fact that the company just sold 37 million shows they may do better than this average.
The second reason investors should consider Apple’s stock is the company’s dividend increase may attract some yield hunters. Many investors screen for companies with a 3% yield or greater. Prior to this increase, Apple wouldn’t have made the cut, today they would. It sounds arbitrary, but with the long-term rate of inflation around 3%, a 3% yield would protect investors from this economic challenge. Investors who wished Apple would pay a better dividend so they could invest are getting exactly what they want.
The third positive is, the significance of Apple’s share repurchase plan. The company expects to repurchase as much as $60 billion in stock over the next two years. At current prices, and assuming the company splits this into $30 billion per year, the company would retire about 8% of their diluted shares each year. If you think about it, this means even if Apple showed just a 10% increase in net income, their EPS would rise by 18%.
Fourth, until the company uses a truckload of their cash, the stock actually has a higher percentage of net cash to market cap. than most of their competition. In fact, with $144.69 billion in net cash and investments and a roughly $383 billion market cap., 37.70% of Apple’s value is cash on the balance sheet. The only other peer to have a higher percentage is RES.IN MOT.DBA BLACKBERRY (FRA:RI1), with 40% of their market cap. represented by cash. Considering that BlackBerry carried just 4.3% global smartphone market share last year compared to 14.9% at Apple, this seems to make very little sense.
By comparison, Google’s cash to market cap percentage is 17.99% and even Microsoft Corporation (NASDAQ:MSFT) comes in lower at 27.88%. Since all of these companies are generating positive free cash flow, each could represent an opportunity. However, Apple’s current percentage is so high that the company is being lumped together with a company that has 71.14% less smartphone market share. Sorry RES.IN MOT.DBA BLACKBERRY (FRA:RI1) fans, but if your stock is an opportunity, Apple is a screaming buy based on this metric.
The bottom line is, even if Apple’s growth was cut in half, between the higher dividend, and significant share repurchases, shareholders should be well rewarded. Once the company takes the wraps off, “some amazing new hardware, software, and services” that CEO Tim Cook referred to, today’s price will seem like a steal.
The article Do Investors Realize What’s Going On? originally appeared on Fool.com is written by Chad Henage.
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