The Steve Jobs Discount: Health Uncertainty Cost Apple $100 Billion


How is it that one of the most-loved, fastest growing, dominant companies in all the land can only be trading at a market multiple? That's equivalent to being a C student for those unfamiliar with the term.

The company in question here is none other than Apple (AAPL). The fact that it trades at a market multiple implies that it is no better than the average stock in the S&P 500 (an assumption that is just insane).

Apple and the S&P 500 both trade at about 11 times estimated forward earnings for the next twelve months, which tells me - and many others - that contrary to the notion that Steve Jobs was propping Apple up, fears about his departure have long been holding it down. Why else would shareholders and analysts have been able to largely shrug-off the worst news to hit Apple in years --maybe ever? Because everybody knew this day might come, long before it actually did. And it's why analysts like Scott Kessler of Standard & Poor's - and virtually every other firm that covers Apple - came out today and backed their "buy" ratings; because Apple is cheap.

"It's obvious there is reason for concern that Jobs is leaving," Kessler says. "But I think it's fair to say Apple has traded at a notable discount in light of Steve Jobs' health issues."

How much of a discount? About $100 billion dollars worth.

We're talking 2 Warren Buffetts worth of a discount, people. Or look at it another way, if Apple were given a 25% premium (which is hardly egregious or unheard of) for the juggernaut of a franchise it is, the stock would be at about $460 a share with $430 billion dollar market value, versus the $360 a share and $345 billion market cap that it currently is.

I am not just pulling these numbers out of thin air. Analysts expect Apple to earn $32a share for the 12-months ending in Sept 2012. It's current forward P/E ratio is 11.5x estimates. If you raise that P/E ratio by 25% you get a forward P/E of 14.3 and if you multiply that by the 2012 EPS estimate of $32a share -- and voila! - you're at $460.

Interestingly, according to Factset, Apple has beaten analyst estimates for 35 consecutive quarters and the average price target of the 51 analysts who cover Apple is $497 a share. "There are many ways to look at Apple," Kessler says. "But it would be hard to suggest that this is an expensive stock looking at the earnings, growth, balance sheet, etc."

It is a substantial loss, but Kessler points to Apple's "phenomenal market position, very strong engineering and design talent, and most importantly, a multi-year roadmap in place."

And there's another thing. Apple also has over $75 billion worth of cash and investments on hand right now. And Kessler says he wouldn't be surprised to see new CEO Tim Cook "be more proactive" with the balance sheet. "They have not engaged in a material buyback program since 1999, they obviously have no dividend, it would not surprise us in the least if Tim Cook took a different approach...which would make the investing public pretty excited," says Kessler.

It would also go a long way towards offsetting that $100 billion Steve Jobs discount that Apple has had to shoulder.

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