Apple Works Its Plan and Shares Still Stay Cheap

TheStreet.com

NEW YORK (TheStreet) -- An email from Apple in my inbox this morning to let me know I can now buy one of two versions of its new MacBook Air.

"MacBook Air is more capable than ever" the solicitation began, "...and now you can enjoy up to 12 hours of battery life on the 13-inch model and up to 9 hours on the 11-inch model. Get it today at your favorite Apple Retail Store. Or buy it at the Apple Online Store and customize it with options..."

My own MacBook is almost four years old so I'm tempted to check out the 13-inch model. Then a business contact sends me an email message that asserts that Apple is "feeling the pressure from Samsung" and is considering the launch of some kind of hybrid often referred to as a "phablet."

A phablet as you might guess is nothing more than an iPhone with a bigger screen (somewhere between almost 5 inches and almost 6 inches). The rather vague message suggested that an anonymous source who attended the June 10 developers' conference learned that the tech giant may decide to compete in the low-cost smartphone market as quickly as possible.

The most reliable source of news about the company is Apple itself. You can go to its "Hot News" webpage and as they used to say in the newspaper business, "read all about it". If it isn't there it's probably speculation.

There's no lack of ideas or innovations at Apple. If the company were to introduce a cheaper iPhone that was in the $99 to $159 range it would very likely blow away the competition. Even if there isn't much of a profit margin in that iPhone, selling one brings the consumer into the Apple ecosystem of products.


Apple is one of the companies listed on the stock exchange that needs no introduction. Its new products, its stated intentions and the full details of its plans to dominate its sector do need continual updates. That's why I encourage investors to regularly visit "Hot News."

From an investment point-of-view Apple is in many ways the most undervalued stock of the famous S&P 500 index. Perhaps one of the reasons is that it has one of the most secretive and discreet corporate cultures and leadership today. The investing public had responded to it with suspicion.

Yet the biggest driving reasons that Apple is likely to knock the lights out of the ballpark in 2013 probably haven't been revealed yet. The "big announcement" most likely hasn't been let out of the bag. CEO Tim Cook, who had to fill Steve Jobs shoes, will time company revelations to its advantage.

In two paragraphs on June 10 Apple unveiled its most important announcement to date, but it doesn't by any means suggest it's the "big one" for 2013. "Apple today unveiled iOS 7, the most significant iOS update since the original iPhone. iOS 7 is completely redesigned with subtle motion, an elegant color palette, and distinct, functional layers that make it feel more alive. The typography has been refined for a cleaner, simpler look, and the use of translucency and motion makes even simple tasks more engaging."

The announcement described hundreds of great new features of iOS 7, "... including Control Center, Notification Center, improved Multitasking, AirDrop, Safari, Siri, and much more." The media hype surrounding iOS7 had the feel of a new era and a sort of genesis.

"With what we've been able to achieve together, we see iOS 7 as an exciting new beginning," said Craig Federighi, Apple's senior vice president of Software Engineering. The iOS 7 beta software and SDK are available immediately for iOS Developer Program members at developer.apple.com. iOS 7 will be available as a free software update for iPhone 4 and later, iPad 2 and later, iPad mini, and iPod touch (fifth generation) this fall."


With its market cap of more than $409 billion the stock of Apple is worth more than all the shares of Exxon-Mobile and pays approximately the same 2.8% dividend yield. Yet at $436 per share Apple sells at a price-to-earnings-to growth ratio (5-year expected) of only 0.52.

To put that into perspective, Google has a PEG ratio (5-year expected) of 1.27, suggesting it too is still fairly valued. But next to Apple, Google shares look expensive.

Let's look at a 5-year chart of Apple to see how shares have performed in all kinds of economic environments. Its trailing 12-month (TTM) revenue line is included as well as the year-over-year quarterly retained earnings growth rate.

AAPL Chart
AAPL data by YCharts

Even though Apple spent more than $10.2 billion in 2012 it was still able to produce nearly $41 billion in free cash flow. As of March 30, the date of its latest quarterly report, its balance sheet indicated almost $148 billion in cash and securities. It has a 31% operating margin (TTM) and a 33.3% return on equity.

On April 23 the company announced its staggering plans to return $100 billion to its shareholders through dividends and stock buybacks by the end of 2015. $60 billion will be stock buybacks, which according to Apple's press release makes it the largest share repurchase plan in history.

Apple's leaders and developers seem to be keenly aware of what the public wants and needs. On Thursday for example, New York Attorney General Eric Schneiderman announced the formation of a coalition of law enforcement agencies devoted to responding to what he called an "epidemic" of smartphone robberies.

The agencies want a sort of "kill switch" that would leave smartphones useless and "dead" if they're stolen. Through no coincidence Apple had already announced at the developers' conference this week that such a feature would be part of its iOS7 software to be released this autumn.


I'm not saying that Apple never falls behind the consumer-demand "eight-ball." Yet this is just another poignant example that Apple has its fingers on the pulse of what motivates buyers and galvanizes consumer loyalty. Someday in retrospect Apple shares at $436 will look awfully cheap.

At the time of publication the author is long AAPL.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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