There are many reasons to invest in Apple. It’s priced at a discount, generates lots of free cash flow, and returns profits to shareholders. Specifically, at $108, Apple is selling at a 23% discount. Its ability to generate lots of free cash flow allows the company to build a cash pile for whatever it desires to do, including increasing dividends, buying back shares, paying down debt, and making investments.
Some investors didn’t believe in the growth trajectory of Apple Inc. (NASDAQ:AAPL) anymore after it restarted its dividend in 2012. However, it looks like it’s still well on a growing path. The question is…will it continue? Should you buy Apple’s stock today?
Holiday Season Sales Boost
In the fiscal year that ended in September, Apple posted revenue growth of 28%, reaching record revenue of almost $234 billion. It was its most successful year yet. In the past few years, Apple generated the most revenue in the first quarter of each fiscal year, that is, the quarter that includes the holiday season.
In fact, Apple posted a record quarterly revenue of $74.6 billion in Q1 2015. Its product lineup for this year’s holiday season and Christmas sales include iPhone 6s and iPhone 6s Plus, Apple Watch with the choice of cases and bands, the new iPad Pro, and Apple TV.
Just looking at the revenue data below, if Apple manages to maintain the usual 48% revenue growth from its previous 3 quarters, its shares might go sideways like it did in the first few months of 2014. If the growth is lower, the shares are likely to fall depending how far off it is. If the growth is higher, the shares might rise such as in Q1 2015 when revenue rose substantially higher, the shares shot up 10% within the following three weeks.
In a month, we shall see if the company’s holiday season sales went well or not.
(The quarterly revenue data below is extracted from Apple’s website.)
Q4 2015 $51.5 billion (ended Sep 2015)
Q3 2015 $49.6 billion (ended Jun 2015)
Q2 2015 $58 billion (ended Mar 2015)
Q1 2015 $74.6 billion (ended Dec 2014) (up 79% from average revenue of previous 3 quarters)
Q4 2014 $42.1 billion (ended Sep 2014)
Q3 2014 $37.4 billion (ended Jun 2014)
Q2 2014 $45.6 billion (ended Mar 2014)
Q1 2014 $57.6 billion (ended Dec 2013) (up 48% from average revenue of previous 3 quarters)
Q4 2013 $37.5 billion (ended Sep 2013)
Q3 2013 $35.3 billion (ended Jun 2013)
Q2 2013 $43.6 billion (ended Mar 2013)
Q1 2013 $54.5 billion (ended Dec 2012) (up 48% from average revenue of previous 3 quarters)
Q4 2012 $36.0 billion (ended Sep 2012)
Q3 2012 $35.0 billion (ended Jun 2012)
Q2 2012 $39.2 billion (ended Mar 2012)
Q1 2012 $46.33 billion (ended Dec 2011)
Apple has been a pretty darn good investment. From the end of 2007, it has gone up about 290%, and it has returned 19.88% rate of return over a 5-year period. Yet at $108 per share, it’s only priced at a multiple of 11.6. This is cheap considering that the consensus analyst earnings growth estimation is about 14%.
According to the F.A.S.T. Graph, using a multiple of 15, Apple’s fair value is about $143. This aligns with Morningstar’s fair value estimate of $140 that was last updated at the end of October. Assuming a fair value of $140, Apple shares are 23% off at $108. Its discounted valuation is one compelling reason to invest in Apple.
Dividend and Earnings Growth
Thanks to its stock buyback program, from 2012 to 2015, Apple’s outstanding shares reduced by 12.5%. And during that period, it was a good time to buy back shares because they were either undervalued or fully-valued. So shareholders would have seen their stake increase.
The buyback program also helped push earnings per share higher by 13.5% per year in that 3-year period. In 2012, Apple restarted its dividend, and it has grown at a compound annual growth rate of 11%, although it only yields 1.9%.
Holding Lots of Cash
At the end of FY 2015, Apple held total cash of $41.6 billion. Naturally, with that much cash, Apple can continue its stock buyback program as well as raising dividends. At the end of April 2015, Apple announced that it intended to utilize a cumulative total of $200 billion of cash by the end of March 2017. This amount includes boosting the 2014 share repurchase program from $90 billion to $140 billion. Cash can also be used for investment opportunities and to pay down debt.
Even though we don’t know how Apple did in the holiday season yet, I would not bet against the company. There are three main reasons to like it here: low valuation, growing earnings, dividends, and a huge buyback program, as well as generating lots of free cash flow to build a cash pile.
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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