Apple growth trading at GE value

9 comments

1. anonymous · 11 August 2010, 15:29

   Well, presumably GE's earnings are "safe" coming form stable market positions, while Apple's are "fleeting", coming from consumer hits, subject to price erosion and disappearance, kind of like Mot's Razr. Or so the theory goes...

2. Rory · 11 August 2010, 22:35

   A 12-month forward P/E, by definition, incorporates the growth expected over the next year.

   Looking at Reuters estimates for the last twelve months and next twelve months shows the following implicit growth characteristics of these valuations: GE's last twelve months normalized EPS was $1.01 and consensus for the next twelve months is $1.17, implying a growth rate of 15.5% (not too shabby for a "value" stock, btw) AAPL's LTM EPS: $12.33, NTM: $16.64, Y-o-Y g: 35.0%. Thus there is an extra 19.5% of growth value built into the P/E ratio. If Apple were expected to grow at only 15.5%, then the "E" in their P/E would be $14.25 instead of $16.64 and their P/E would be 18.2 instead of 15.5.

   All of that aside, since when is 14.0 equal to 15.5? If GE could expand their multiple from 14.0 to 15.5, their market cap would go up by about $20bn (conversely, if AAPL's multiple contracted to 14.0 then they would lose $24bn). That may not sound like a lot, but $20 billion here, $24bn there--pretty soon you are talking about real money...

3. asymco · 12 August 2010, 02:41

   Apple hasn't grown its business at 35% for a long time. Here are quarterly EPS growth rates since CQ4 2006: 77% 85% 75% 58% 59% 40% 32% 155% 37% 46% 61% 11% 47% 86% 75%

   My forecast for the next two quarters: 74% 55%

   Only during the great recession growth dropped to 37% for one quarter and 32% in June 2008. (The 11% growth in Q309 was due to the 155% a year earlier during the 3G launch quarter.)

   If this company is to be considered as valuable as one that grows at 15% then I think valuation has become decoupled from fundamentals.

4. asymco · 12 August 2010, 02:48

   I might also add that Apple in 2006 was a different company. More than half of current revenue is from products that did not exist four years ago (iPhone and iPad). These new products have arguably created new markets and they are growing with minimal competition in these markets. Which is why they have demand far in excess of supply. Which, in turn, allows growth rates constrained only by production ramps, and those ramps are probably limited at 100%. So whereas the Mac and iPod businesses will grow subject to buffeting of the macro conditions, the iPhone and iPad will grow much more rapidly.

   I don't see how these dynamics are correlated to the products that GE sells.

5. bfl · 12 August 2010, 04:22

   @asymco said: "I don’t see how these dynamics are correlated to the products that GE sells."

   A heroic example of restraint. :)

6. Rory · 12 August 2010, 07:52

   I don't see how AAPL's stock price is correlated to GE's.

   You didn't address either of my fundamental points: 1) Forward P/E is a poor way to look at how the market thinks about growth, because high growth assumptions will drive up both the price and the forward earnings, essentially canceling each other out. 2) 14 != 15.5

   At what multiple do you think Apple should be trading?

7. asymco · 12 August 2010, 09:17

   I don't have a multiple that I can put forward as correct as that depends on sentiment. All I can do is observe the relationship between Apple's P/E and its growth rate, which should be correlated. I proposed a different measure than forward P/E called PETG (Price over Earnings over Trailing Growth) here: https://fnayeri-ulqtb.wpcomstaging.com/2010/08/01/apples-valuation...

   This measures current value as a function of TTM growth and avoids any speculation about the future. The PETG is now running in the range observed during the worst part of the recession (and that includes cash.)

   Incidentally, I've also compared AAPL's performance relative to the S&P 500 and shown that it's being considered less valuable than an average large company.

   https://fnayeri-ulqtb.wpcomstaging.com/2010/06/19/apple-considered...

   So in comparison to Apple historically and its peer group of large caps, then today's value is shown to be nearing historic lows.

   I'm also considering a further analysis of Apple as a takeover candidate due to its depressed value. If capital for such a venture could be gathered (admittedly an impossible task today), I think it would prove a wonderful investment as taking it private could unlock significant value even over an acquisition premium.

   Normally undervalued companies that are vulnerable to takeover are badly managed which accounts for the discount. Perhaps that's what is going on, though I'm not sure how Apple's management team can be justified as underperforming.

   See also: https://fnayeri-ulqtb.wpcomstaging.com/2010/05/11/apples-valuation... https://fnayeri-ulqtb.wpcomstaging.com/2010/05/10/apple-pe-briefly... https://fnayeri-ulqtb.wpcomstaging.com/2010/04/21/apple-continues-... https://fnayeri-ulqtb.wpcomstaging.com/2010/01/31/the-effect-of-re... https://fnayeri-ulqtb.wpcomstaging.com/2010/02/17/apple-as-macroec...

8. asymco · 12 August 2010, 09:30

   Re. 14 != 15.5, that's correct. But the reason I don't address your argument is because I hold the consensus estimate for NTM in highest contempt.

   For analyst track record I refer to a small representative sample: https://fnayeri-ulqtb.wpcomstaging.com/2010/05/03/analysts-predict... https://fnayeri-ulqtb.wpcomstaging.com/2010/02/26/kathryn-huberty-...

9. asymco · 12 August 2010, 09:53

   One more point: EPS TTM is 13.28 not 12.33.