AAPL: BUY; PT $160; 2Q15 Update

AAPL: 5/10/15; $127.62

From Thomson Reuters I/B/E/S Estimates:

Forward Earnings: 9.15

Forward PE: 13.95

Earnings Growth Rate (EGR): ~13%

PEG Ratio: 1.07

S&P Forward PE: 17.95
S&P EGR: 7.19%

AAPL reported earnings on Monday, April 27.  All-in-all, it was a great quarter, as far as I'm concerned.  AAPL increased the dividend, increased its authorization for share buy backs, reported a crazy amount of iPhones sales, reported large increases in China revenue, and, well, read the transcript-it's not my job to repeat it for you!

The facets of the call that I was most encouraged by were AAPL's growth in China, commentary on ResearchKit, and reviews on the Apple Watch.  The growth in China is a huge benefit for AAPL shareholders, as it is a great way to rebut the "law of large numbers" theory that says AAPL cannot continue to grow because it is already too big.  China's top two mobile providers both surpass the subscribers of AT&T and Verizon combined.  In addition, a large proportion of China's mobile subscribers are using 3G phones.  This means there is significant opportunity for AAPL to capture user upgrades to 4G iPhones.

The ResearchKit commentary was exciting, because it shows that AAPL is continuing to create solutions, particularly in the highly lucrative medical field.  The following is taken from the recent earnings call:

"And last month we announced ResearchKit, an open source software framework that helps doctors and scientists gather data from medical research participants more efficiently and accurately using iPhone applications. The response so far has been simply amazing, far exceeding our expectations. The first research apps developed using ResearchKit study asthma, breast cancer, cardiovascular disease, diabetes, and Parkinson’s disease, and have enrolled over 60,000 iPhone users in just the first few weeks of being available on the App Store. Over 1,000 researchers have contacted us expressing interest in performing studies through ResearchKit. We think these types of solutions have the potential to revolutionize medical studies in life-changing ways, and we’re proud that Apple is helping make this possible."

A close relationship with the medical field could bode well for future medical functionality of the Apple Watch.  Speaking of, according to Apple CEO Tim Cook, everybody loves the watch so far.  I maintain that this product will not be a game changer initially, but the potential uses of the watch are enormous, especially in the health/medical field.

Common Sense Take:

AAPL is undervalued relative to the PE of the S&P but is a far better than average company.  While growth estimates for AAPL are not significantly higher than that of the S&P, I don't feel like the estimates currently include any medical functionality breakthroughs (rightfully so).  I feel like AAPL's growth will more likely accelerate than decelerate due to its track record and future prospects.  And if not, unleash the cash (i.e. increase dividends)!!  

Common Cents maintain its BUY opinion on this position and establishes a price target of $160, assuming a PE ratio of 17.5 is conservative given the great culture, long-term track record, potential for major breakthroughs in growth, and ability to return cash to shareholders if growth slows.  The assumed PE is below the current near-18-PE of the S&P, as I see the potential for a "correction" (sell-off) of the overall market after its extended duration of growth.  In addition, the lower assumed PE of AAPL is warranted given the polarizing nature of this position with investors.

Going forward, I hope to sell part of Common Cents's position when the share price exceeds $140 to reduce the position to the target allocation.