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Apple at Cheapest Since 2000 Signals Buy to Gamco, Thornb

By Lu Wang and Leslie Picker
February 13, 2013 4:55 PM EST 23 Comments
Apple at Cheapest Since 2000 Signals Buy
Apple at Cheapest Since 2000 Signals Buy

The cheapest Apple Inc. shares in 12 years are encouraging some of the world’s biggest investors to bet that the stock will rebound after losing 33 percent of its value on concern about slowing profit growth.

The world’s largest company by market value is trading at a 29 percent discount to the Standard & Poor’s 500 Index, near the widest gap since December 2000, data compiled by Bloomberg show. While analysts have cut price targets by 21 percent since the stock peaked in September, the shares would rise 41 percent to $661 if investors valued the stock at the price-earnings ratio of the S&P 500, the data show.

Apple has lost more than $200 billion in market value as increased competition and a lack of breakthrough products threaten to reduce profit margins. The pessimism is exaggerated because the company still dominates the smartphone and tablet markets and has enough cash to return to shareholders, according to Gamco Investors Inc., Thornburg Investment Management Inc. and Brown Advisory. Their funds bought Apple shares as they slumped from their record high in September.

“Apple is being held to a standard unlike any other company,” Howard Ward, the chief investment officer at Rye, New York-based Gamco, which oversees $36.7 billion, said in an e- mail last week. His firm bought Apple shares at about $500 this year. “Apple is not the zombie it is being valued like.”

Future Products

The stock closed yesterday at $467.90 a share, leaving the company’s market value at $439 billion, compared with an all- time high of $658 billion in September. The shares are valued at 10.6 times reported earnings, trailing the S&P 500’s multiple of 15, data compiled by Bloomberg show. The last time the Cupertino, California-based company traded at such a discount, it went on to rally 47 percent in 2001.

Apple lost 0.2 percent to $467.01 at 4 p.m. in New York today.

Investors have grown concerned about whether Chief Executive Officer Tim Cook will be able to roll out products that will fuel growth after the death of co-founder Steve Jobs, who oversaw the introduction of the iPod, iPhone and iPad. The company has a team of about 100 product designers working on a wristwatch-like device that may perform some of the computing tasks now handled by the iPhone and iPad, two people familiar with the company’s plans said.

Analysts predict Apple stock will climb to $613.40 over the next 12 months, according to the median projection compiled by Bloomberg. That is down from $780.69 in September. Among 64 analysts, 51 have the equivalent of buy ratings while two advise investors to sell, the data show.

Returning Cash

Cook offered a dividend last year for the first time since 1995. The company said on Feb. 7 that it’s in “active discussions about returning additional cash to shareholders” after David Einhorn’s hedge-fund firm Greenlight Capital Inc. said Apple is hanging on to too much of its profit.

Apple, whose $137.1 billion pile of cash and equivalents is equal to about the size of Hungary’s 2011 gross domestic product, was generating $130 million in cash a day in the past 12 months, faster than any non-financial company in the S&P 500, according to data compiled by Bloomberg.

Legg Mason Inc.’s Chairman Bill Miller told the Financial Times that Apple is undervalued. Miller, who beat the S&P 500 for a record 15 years before a bet on financial stocks backfired, said the stock could be worth 50 percent more should the company earmark more money to a dividend, according to a Feb. 5 report posted on the newspaper’s website.

‘Cash Rich’

“This is a high-quality company,” Doron Eisenberg, a fund manager at Baltimore-based Brown Advisory, which oversees $32 billion, said in a Feb. 7 phone interview. “It’s in the fastest-growing areas. Value investors can look at the cash-rich balance sheet as a positive.”

Stocks with a valuation discount outperformed last year. The 78 companies that were at least 30 percent cheaper than the S&P 500 at the beginning of 2012 rose 15 percent on average during the year, data compiled by Bloomberg show. That beat the 13 percent gain in the index.

Apple boosted full-year net income to $41.7 billion in its latest fiscal year from $65 million a decade ago, amid a transformation from a near-bankrupt personal-computer maker to a technology leader. Earnings will rise at an average rate of 7.7 percent a year through 2015, analyst estimates compiled by Bloomberg show.

Record Earnings

Last year’s annual net income was the third-highest in U.S. corporate history, and the company may set a record should it match Wall Street predictions for $48.3 billion in fiscal 2014, according to data compiled by Bloomberg. Exxon Mobil Corp. posted the biggest-ever yearly profit with $45.2 billion in earnings in 2008.

For one day last month, Apple lost its title as the world’s biggest company by market capitalization to Exxon Mobil after posting the slowest quarterly profit growth since 2003.

“Many investors are concerned that gross margins have peaked and that Apple is well-penetrated in the handset market,” Connor Browne, a fund manager at Santa Fe, New Mexico- based Thornburg, which manages $80 billion in assets, said in a Feb. 7 phone interview. “Our guess is that there’s more room for the company to grow. If that’s the case, today’s valuation will look like one heck of a buying opportunity in hindsight.”

Samsung Electronics Co. and others are grabbing market share by introducing smartphones in various designs and prices. In the tablet market, Apple’s dominance is threatened by rivals such as Google Inc., which made its first foray with its Nexus 7 device.

‘Enormous Umbrella’

“What Apple chose to do is basically have a high-margin, niche product and it created an enormous umbrella for other people to come in underneath,” Donald Yacktman, founder of Austin, Texas-based Yacktman Asset Management, said in a Feb. 7 phone interview. His $9.5 billion Yacktman Fund beat 99 percent of its peers over the past five years and never owned the stock. A price-earnings ratio “is a very deceptive thing to look at when you look at a stock like Apple, given where the profit margin has been and where it’s likely to be down the road.”

Gross margin, or how much Apple earns after paying for raw materials, labor and production to build iPhones, iPads, Macs and other products, is projected to remain below 40 percent through 2016, after peaking at 47 percent during the fiscal second quarter of last year, according to analysts’ estimates and financial data compiled by Bloomberg.

‘Not Swinging’

“Up until this point, we’ve definitely been comfortable not swinging at the pitch,” David Kessler, an analyst at New York-based value investment firm Robotti & Co., which has $600 million in assets, said in a Feb. 7 telephone interview. “As the valuation does come down it gets more interesting, but it hasn’t gotten to a place yet where we’d be comfortable investing.”

Apple’s PEG ratio, which compares a stock’s price-to- earnings multiple with its projected profit growth rate, stood at 0.58, below an average of 3.1 for companies in the S&P 500 and trailing all but four stocks, according to data compiled by Bloomberg.

The company deserves a similar multiple to branded-products companies such as Ralph Lauren Corp. because it has attracted loyal customers, according to John Roscoe, who helps manage $4.3 billion at Roosevelt Investment Group Inc. Shares of the clothing retailer are trading at 23 times earnings, more than double Apple’s valuation.

‘Pay Up’

“People have over its history shown an inclination to pay up for Apple products,” Roscoe, whose firm owns Apple shares, said in a Feb. 7 phone interview. “They still have an army of design and engineering people coming up with the next best thing.”

John Buckingham, chief investment officer at Al Frank Asset Management in Aliso Viejo, California, began investing in Apple at $7 in 2003 and sold some of the shares at $585 last year. Should the stock drop to $430, his firm would start buying again, he said.

“The fear that people have for Apple is, ‘Can they stay cutting edge?’” Buckingham said by phone on Feb. 7. “You’ve kind of broken the invincibility that a lot of people thought Apple had, which is good. If we’re going to buy it, we want people to be questioning it. We’re getting questions. We like that.”

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Leslie Picker in New York at lpicker2@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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