Publications
Partners
AT ABOUT $550bn, Apple's market capitalisation is
mind-boggling. But for a company growing as quickly as it is, the iPhone maker
trades at an absurdly low 12 times forecast earnings for the year to September.
A new Breakingviews calculator shows why even cautious
shareholders shouldn't worry: even if growth and margins decline improbably
fast, Apple should still be worth far more in 2016.
Companies in the S&P 500 index are collectively priced
at about 14 times forecast 2012 earnings, given those earnings are expected to
be about 7% higher than in 2011, according to Standard & Poor's.
Fast-growing companies usually trade at higher multiples.
Bizarrely, investors award Apple a lower price-to-earnings ratio than the index
even though the company's bottom line almost doubled in the first calendar
quarter of this year from the year before.
Strip out Apple's $110bn of cash at the end of March and the
multiple for the business looks even more anaemic, at around 10 times. If
current growth trends persist, it's not hard to justify a $1 trillion
valuation.
But give the sceptic his due. Suppose chief executive Tim
Cook can't sustain Apple's better than 50% annual revenue growth, and
competitive pressures quickly squeeze its profit margin down from the roughly
25% achieved recently.
What if growth slows to a modest 10% in Apple's financial year
to September 2016, and the company's profit margin drops to 15%?
Well, things still wouldn't look too bad. Even assuming
top-line growth declines faster in the earlier years, Apple would earn about
10% more in 2016 than the $44bn analysts expect this year.
With more pedestrian growth than currently, Apple would be
seen as a more normal company. Attach the long-term average S&P 500
price-to-earnings ratio of about 15, and it would be worth some $720bn.
Of course, Apple also would have stockpiled more cash by
then, too. And technology companies have over the last 15 years traded on
average at higher, not lower, PE ratios than the norm. So that valuation in
2016, like today's, might look conservative.
And apart from a 32% capital gain, investors would have
collected the company's recently announced dividend payouts along the way. Even
with ultraconservative assumptions, Apple doesn't look likely to go rotten any
time soon.
- Reuters
* Richard Beales is a Reuters Breakingviews columnist. The opinions expressed are his own.
