From Thomson Reuters I/B/E/S Estimates:
Forward Earnings: 9.85
Forward PE: 11.95
Earnings Growth Rate (EGR): ~8%
PEG Ratio: 1.49S&P Forward PE: 17.48
S&P EGR: 5.67%
Apple reported its quarterly earnings for the fourth quarter on October 27, 2015. Headline numbers included a 38% year-over-year (y-o-y) increase in quarterly earnings-per-share (EPS) and a 22% y-o-y increase in quarterly revenue. For the full year, Apple grew earnings by 43% y-o-y and grew revenue by 28% y-o-y. Those numbers are pretty astronomical for a large company facing "the law of large numbers." However, it does appear that Apple will face slower growth going forward until one or more of its other products/services takes off in a major way (we're looking at you, Apple Watch).
Apple's revenue guidance for the upcoming quarter, which includes all of Apple's holiday season sales, indicates that Apple expects to grow the "top line" (jargon for revenue) by 2.5%. Analysts expect Apple to grow revenues by approximately 3.5%. Apple has traditionally exceeded analyst's estimates; however, even when exceeding an estimated 3.5% growth, that is still a significant reduction in the growth rate.
During the same quarter a year ago, Apple drastically exceeded estimates due to manufacturing more iPhones than anticipated and increasing the operating margin more than expected. It does not seem reasonable to expect a similar outperformance this quarter; however, unexpected outperformance is not exactly something we can expect.
Thus far, iPhone sales have represented the majority of Apple's revenues and, therefore, get the majority of analyst's attention. Apple sold 22% more iPhones overall this quarter than last and 120% more in China. Take that China doubters. However, minimal iPhone sales growth is expected this quarter relative to the year ago quarter. This has been the primary driver of Apple's decrease in share price over the past few quarters and will remain a significant challenge to share price appreciation going forward.
The next quarter will be particularly important, given that it could be the first quarter that Apple posts subpar growth. Or more dramatically, this could be the "beginning of the end" for Apple's rapid growth period. It does seem that growth will be subdued over the near future, and potentially afterward, but Apple is by no means on the verge of becoming extinct. There are multiple avenues to accelerate future growth, including app sales, the Apple Watch, Apple TV, and Apple in the automobile. None of these options are credible as a significant growth driver immediately; however, time will tell.
Phew. That was a lot of "negative" commentary. Heres the bright side: If Apple in fact does slow its growth to the point that its shares do not continue to appreciate, then Apple can tap into its $40 billion cash on its balance sheet and $70 billion cash it generates each year. Assuming that all of the $70 billion was returned to shareholders in the form of a dividend, each shareholder would receive $12.5 per share each year, or a dividend yield of 10.6%. Who needs capital appreciation at that point. That is not a realistic expectation, but it is indicative of the massive ability of Apple to return value to shareholders even without the rapid growth that Apple has enjoyed for so long.
Common Cents views Apple shares as fairly valued at $135. This valuation assumes a forward PE of nearly 14, which is 20% below the forward PE of the S&P. However, given Apple's slowing growth and the potential for the S&P to decrease as the fed raises interest rates, Common Cents views this valuation as appropriately conservative. At a valuation equivalent to the S&P's current PE, Apple share prices would reach $170 [17.48 (S&P forward PE) x 9.85 (AAPL EPS estimate)]. Due to Apple's current share price being significantly below the conservative valuation of $135, Common Cents views Apple as an attractive Buy.
Common Cents Take: It looks like the Apple growth engine may be slowing over the near future. However, if that is the case, great! Time to rake in high dividends. Realistically, Apple has multiple mechanisms to ignite future growth through the Apple Watch, Apple TV, and Apple in the automobile, not to mention products we aren't aware of yet. The situation is still a win-win.
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