Apple: Cheap from nearly every angle

by Richard Moroney, editor Dow Theory Forecasts

Apple (AAPL) looks cheap from nearly every angle. At 13.5 times trailing earnings, Apple hasn’t been this inexpensive in at least a decade.

The shares are trading 48% below their five-year average P/E ratio. Shares also trade below five-year averages for price/sales (17% discount), enterprise ratio (34%), price/operating cash flow (62%), and price/book value (29%).

Apple’s attractive valuation is remarkable considering its shares have nearly doubled over the last two years.

But the stock has become listless in the past month; proposed reasons for the slump abound, including Apple’s rare earnings miss in the September quarter, Thailand floods crimping supply channels, and new challengers in the tablet-computer market.

Apple’s weakness could also hint at a changing perception among investors, who may believe Apple’s best days of innovation are over. But we remain confident in Apple’s growth story

Apple continues to churn out electronic devices beloved by millions. First-day orders for the iPhone 4S exceeded the iPhone 4’s initial release by 67%, topping 1 million units. The phone’s Siri speech-recognition software has become a particularly popular feature.

Long known for its consumer appeal, the company said more than 90% of Fortune 500 companies are testing or distributing iPads and iPhones for workers.

Apple seeks to bolster brand loyalty by streamlining a digital ecosystem among its products. Owners of Apple devices can synchronize media fi les to their various iPhones, iPads, and Macintosh computers. And for $25 per year, users can remotely access songs from their iTunes library.

All these factors should sustain Apple’s operating momentum. The company has grown sales more than 30% in 10 straight quarters, and cash from operations rose 47% or more in each of the last eight quarters.  

Apple, notoriously tight with its money, holds more than $81 billion in net cash and marketable securities, or nearly $87 per share.

New CEO Tim Cook says Apple will remain prudent with its cash but doesn’t feel pressure to hoard it. “I'm religious about a lot of things but not that one,” he said in October, leaving open the possibility of a dividend or share-buyback program.

In fiscal 2012 ending September, Wall Street sees Apple delivering 25% higher per-share earnings. Yet Apple shares trade at less than 11 times year- ahead earnings, an 18% discount to the average for its peer group.

We recommend that investors scoop up its shares on the cheap. Apple is a Focus List Buy.

Learn more about this financial newsletter at Richard Moroney's Dow Theory Forecasts.