Apple's PEG Ratio Signals Share Price Gains Ahead

On Friday, Apple (AAPL) closed New York trading at 343.26, up $7.59 on the day and up  $16.91 or 5.2% on the week. Although the week's share price advance was impressive, Apple remains significantly under valued based on the company's current rates of revenue and earnings growth. In the first six months of the current fiscal year Apple's revenue has risen 76.2% and earnings per share has gained 83.2%. In contrast, since the first trading of Apple's current fiscal year on September 27, 2010, the share price has responded with only a 17.9% gain.

Last week in a post titled AAPL: The Coiled Spring I compared the median price targets for three popular equities: Amazon, Apple and Netflix and the share prices for each of these companies. Apple is trading at a price-earnings multiple of 16.35 times trailing 12-month earnings of $20.99 per share and at only 76.3% of the median Wall Street price target of $450 per share. In comparison, both Amazon and Netflix are trading at much higher price earnings multiples and at or near their respective median price targets.

Apple's PEG Ratio: More Share Price Gains Ahead

For today's post I asked Jeff Fosberg of the Apple Finance Board to adapt his popular "coiled spring" graphic to reflect not the price-earnings multiples of the above-referenced companies but the PEG ratios of the companies at Friday's closing prices. 

Simply defined, the PEG ratio represents the price-earnings multiple divided by earnings per share growth. The lower the PEG ratio, the lower the current valuation relative to rates of earnings growth. Apple's current PEG ratio is 0.63 versus 2.92 for Amazon and 1.98 for Netflix. Compared to high-flying stocks such as Amazon and Netflix, Apple is bargain priced and the company's current PEG ratio signals more share price gains ahead. Because Amazon, Apple and Netflix operate in different product and service markets, the PEG ratio is a more effective way to compare and contrast the current market valuations of the three popular equities than a comparison of price-earnings multiples alone. This comparison accentuates the deep discount to growth at which Apple currently trades.  

Apple's Price Targets and EPS Growth Expectations

Although the median Wall Street price target for Apple is presently $450 per share, my price target for Apple is $590 and is  based on strong revenue and earnings growth expectations. For the three-month period that ended in late June (FQ3 2011), I expect Apple to report revenue growth of about 70% to $26.219 billion and eps growth of about 90% to $6.67 per share. For the fiscal year that ends in late September, I forecast earnings per share of at least $27.50 and an eps growth rate of no less than 81.5% on revenue of at least $112 billion. At Friday's closing price AAPL is trading at a multiple of only 12.5 times this FY 2011 eps estimate.  

Apple's pace of revenue growth in the June quarter will be impacted by the appearance of Apple iPad sales in the prior-year period for the first time. However, the rate of earnings per share growth will benefit from Apple's ability to contain the growth in operating expenses to less than 10% of reported revenue.


The Apple iPhone has been in the market for only four years and the Apple iPad is in a nascent stage of global market development. The two products combined will sustain impressive rates of revenue and earnings growth for Apple over the next several quarters. The Wall Street consensus revenue estimate for FY2012 is only $125.13 billion or 11.7% above my FY2011 revenue forecast of $112 billion and the FY 2012 Wall Street eps estimate is only $28.86 per share or 4.95% above my FY 2011 estimate of $27.50. Wall Street FY 2012 revenue and earnings estimates will rise dramatically over the next several months and significant revisions in analyst estimates will occur soon after the release of the June quarter numbers later this month. Today's highly discounted valuation for AAPL will appear even more obvious following the release of the June quarter results. 

Conclusions

No matter last week's 5.2% rise in Apple's share price to $343.26, the shares continue to trade at a significant discount to current rates of earnings growth. At Friday's closing price AAPL is trading at 16.35 times trailing 12-months earnings per share and at only 12.5 times my current eps forecast for the fiscal year ending in September. Apple's PEG ratio of 0.63 signals more share price appreciation ahead. Compared to other popular equities such as Amazon and Neflix, Apple's current valuation renders the shares dirt cheap. 

Disclosure: The author is long AAPL shares

Robert Paul Leitao