I couldn't help partially stealing the title of this article: "BUY OR SELL - Are Apple shares ripe for buying?" the article is essentially discussing whether the market is too heavily discounting Apple shares following the news of Steve Jobs (Apple's CEO) taking leave for health reasons.
As I have mentioned in class a few times now, market prices in the current market suggest to me that we are currently in a buyer's market.
Let's consider Apple's price at around $83 per share (at the time of writing). That's about a PE (price to earnings) ratio of under 16.5, the lowest PE ratio for Apple in the last 5 years is about 15.9 (note that the forward PE ratio, that is when the earnings are the expected earnings for this year and not last year's, the ratio drops to around 11). With an ROE (return on equity) of about 27 and sales growth in excess of 20% how can we reconcile the apparent strength of the company's financials with their PE ratio?
If we think about our model of value, what does this suggest that the market "feels" about the earnings of Apple? For example, does it seem like the pricing is reflecting a low sustainability (or persistence) of this past performance?
Does it appear that the sustainability of their earnings is low?
Does one individual make that much of a difference to the strategy of the company?
Or maybe, it's being undervalued due to speculation...?
Although Steve Jobs is one of the most famous CEO's in the world today, I don't think the announcement of his absence is the sole reason for Apple's currently declining stock price. I believe that Apple's business strategy in the current economy could be what is causing the decline in price.
ReplyDeleteApple operates under a differentiation strategy. They don't really compete on price because they haven't had to in the past. Apple has been able to charge a large premium because their products are more unique, trendy, and fun that those of competing manufacturers. Although Apple has been successful in the past due to this strategy, perhaps they will not be as successful in the future due to a shaky economy and the resultant decline in personal disposable income.
For example, I have a MacBook and really enjoy using it. I bought it roughly a year ago and have been quite happy with it. However, if I were forced to buy a computer today it would not be a Mac. I would buy a much less expensive computer that would be just as functional (perhaps a Dell or HP that would satisfy all my schooling and business needs). The computer might not have as many fun applications, but those are the types of things I would be willing to sacrifice as a result of having less money.
I still don't think that Apple is on the decline, however. The iPod and iPhone have revolutionized the way we listen to music and communicate. The iPod has nearly become a necessity and people continue to buy them. As Apple further realizes manufacturing economies of scale, it will be able to produce a product less expensively. Their margins will increase. Whether those savings are passed on the customer or not is uncertain.
iTunes also has become the largest music retailer on the planet, surpassing WalMart last April.
I believe that Apple can continue to meet or exceed investor earnings expectations. Although Steve Jobs is very important to the company, I think Apple will still be successful in his absence. Furthermore, I think they can be even more profitable if they were to compete on a more cost-focused level given the current state of the economy.
In this soft market, I'd guess Apple is a good buy.