Apple Inc. (NASDAQ:AAPL), one of the world’s most beloved companies, trades at nine times forward earnings. Consolidated Edison, Inc. (NYSE:ED), easily one of the most boring, trades at 15 times forward earnings.
How can that possibly make sense?
It’s actually pretty rational. There are two types of companies that deserve a high valuation multiple: Those in a rapid growth stage, and those with stable and predictable profits. I don’t believe Apple fits either. Consolidated Edison, Inc. (NYSE:ED) does.
Apple Inc. (NASDAQ:AAPL) needs to reinvent itself year after year, creating new products that are bigger, better, and faster than before. It’s done a remarkable job of that over the last decade. But what are the odds that one of its next attempts at reinventing itself will fall short of past successes? Quite high, I’d say. Maybe not this year or next, but any company operating in a short-cycle high-turnover market will eventually miss a step. I struggle to think of another company forced to innovate as ferociously as Apple Inc. (NASDAQ:AAPL) that has prospered consistently for more than a decade or two.
The point isn’t that Apple Inc. (NASDAQ:AAPL) won’t come out with something massively innovative in the near future. It very well may. But it operates in an industry where it needs to in order to stay relevant. The reality that it may not has to be discounted when thinking about Apple Inc. (NASDAQ:AAPL)’s future. It’s just very hard to predict Apple’s future earnings. And the market hates uncertainty.
Contrast this with Consolidated Edison, the utility giant. Its prospects for growth are abysmally low. The odds that it will grow earnings any faster than inflation round to zero. It is boring. It makes no headlines. It never comes out with exciting products.
But not having to innovate has its advantages. We can say with pretty good certainty that Consolidated Edison, Inc. (NYSE:ED) will be cranking out profits five, 10, and 20 years from now. Same for a company like Colgate-Palmolive Company (NYSE:CL). Toothpaste is boring and has no chance of changing the world. But the odds are high that Colgate-Palmolive Company (NYSE:CL) will be a toothpaste king 20 years from now, and 50 years and beyond. There’s predictability. The market loves predictability, and it’s willing to pay up for it with an above-average valuation.