Has Apple Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Apple (Nasdaq: AAPL  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Apple.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 44% Pass
  1-Year Revenue Growth > 12% 67.6% Pass
Margins Gross Margin > 35% 42.4% Pass
  Net Margin > 15% 25.8% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 1.58 Pass
Opportunities Return on Equity > 15% 45.6% Pass
Valuation Normalized P/E < 20 21.83 Fail
Dividends Current Yield > 2% 1.7% Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   7 out of 9

Source: S&P Capital IQ. NM = not meaningful; Apple just initiated a dividend policy in 2012. Total score = number of passes.

Since we looked at Apple last year, the iDevice giant has kept its 7-point score. But the appearance of a dividend puts the company in a much better position to achieve perfection going forward.

Apple is the main reason the stock market has done so well lately. On the product front, the company's successes just keep coming. The third version of its iPad sold more than 3 million units in just the first weekend it was available. Meanwhile, rumors that the iPhone 5 could be available as early as June have analysts again thinking that Apple's revenue could keep growing at its explosive pace for some time, especially as it supplants Research In Motion (Nasdaq: RIMM  ) in penetrating the corporate market, which RIM used to have a lock on.

One key to that growth will be emerging markets. Fool analyst Eric Bleeker believes that with Brazil having had limited iPhone 4S availability during the holiday season and China having none, this quarter could be a blowout for the smartphone giant. As Apple iOS and Google (Nasdaq: GOOG  ) Android activation volume in China overtakes U.S. figures, Apple's focus will necessarily shift more toward overseas markets.

The unknown for Apple is how its Apple TV initiative will perform. With Intel (Nasdaq: INTC  ) and Microsoft (Nasdaq: MSFT  ) also trying to line up content and distribution channels for similar ventures, Apple has the advantage of the iTunes ecosystem to sell to already-captured customers.

With a dividend now in place, all it would take for Apple to achieve perfection is a slightly lower valuation and a small increase in its payout. Given its explosive growth, however, arguments that Apple is overpriced don't carry as much weight as they may have with past market-cap leaders. If Apple can continue its product dominance, it could be the first stock to reach a perfect 10 on our scale in future years.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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Add Apple to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Google, Microsoft, Apple, and Intel. Motley Fool newsletter services have recommended buying shares of Google, Apple, Microsoft, and Intel, as well as creating bull call spread positions in Microsoft and Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (8)

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  • Report this Comment On April 06, 2012, at 4:56 PM, ade61 wrote:

    Apple stock price is worth every penny, that’s if you are smoking the right stuff.

    The insanity of the speculative markets continue to be cheered by deceptive advocates who have made fortune but don’t acknowledge the actually cost to the United States future which is likely to see a declining standards of living in the year ahead . This is all done for a cause, so that a handful of people can make their billions by manipulating the stock market to show an illusion of prosperity returning to the economy.

    The analysts who are projecting Apple stock to reach $1000 a share are the likely the same expletive, which made though wonderful forecasts about similar bubble stocks during dot com bust.

    I would have like to use the actual word which best describe these analysts, but I probably would be censored.

    The rapid rise in apple stock price has nothing to do with current earnings but is based solely on speculative growth with GREAT EXPECTATIONS that sales growth will increase by 20% annually or more for the next five years. This is why the cheerleader believes apples stock is significantly undervalued even though it has increased by over 250% in the less than 2 years.

    If apple stock price continues to increase, don’t jump for joy. The continually increase is nothing but herd investing which has caused apple’s stock to increase by 56 % since the beginning of the year.

    It was not long ago the herd believed that house prices could never go down but would continue to increase rapidly year over year. Just as the apple cheerleaders believe its stock price cannot decline, but will continue to increase. As long as the herd believes the fairytales being promoted in regards to Apple’s sales growth its stock price will increase. As soon is its earnings and net income do not meet the ridiculous expectations it will drop.

    FACT:

    Apples 2011 net income is reported to be 26 billion on revenues of 128 billion. This is a 185% increase from Apple’s 2010 net income which was 14 billion. A good majority of Apple earnings came in the 4th quarter, I.E holiday season when it s gross earnings increased by about 18 billion from the previous quarters to over 46 billion. Unbelievable wouldn’t agree?

    The herd believes that Apple can expand it sales by 20% a year for the next 5 years is a deception. To accomplish this apple sales will have to increase to 153 billion in 2012 and by 2016 and have annual sales of 318 billion.

    I don’t know how the herd can believe this fabrication. I guess they are smoking some good dope.

    Based on last year revenue and the prediction that sale will increase by of 20%, Apple’s net income will not exceed 40 billion in 2012. Apple’s net profit is approximately 20% based on 2011 earnings and net income.

    Sales – cost of goods sold / sales = net profit

    128 billion – 102 billion / 128 billion ≈ 20 %

    2012 revenue if sales increases by a 20%.

    128 billion X 1.20% ≈ 153 billion

    2012 estimated Net Income from gross sales.

    153 X 20% ≈ 31 billion

    Every additional billion of net income will be more difficult to earn, due to its enormous size which is 1000 million. If the analyst’s 2012 forecast are correct Apple’s revenue will increase by 25 billion or 25000 million dollars. This amount of money buys quite a few Ipads, downloads and other apple products. How many more apple product can the market absorb?

    By comparison NASA Space Shuttle operating budget in it last year was 3 billion. I provide this as an illustration, to give the cheerleaders a clued about the staggering amount of income apple currently has.

    Apples net income from the past five years, from 2007 to 2011 is approximately 56.5 billion. A major jump in sale and income came in 2010 to 2011 when its net income increased by 11.91 billion.

    What is never asked is how a company with a net income of 26 billion in 2011 can have achieved a market capitalization of 590 billion. I realize there is a difference between market capitalization and the use of a capitalization rate to determine value. However, market capitalization is a qualitative value not easily determine as it represents the public consensus on the value of a company's equity and in Apple’s case it had been inflated.

    The use of a capitalization is a quantitative method to determine value from quantifiable data such as income and expenses.

    It is relatively easy to determine Apple value utilizing its net income and a capitalization rate. Apple average net income over the last 5 years is 11.3 billion. This income average would typically be utilized to estimate a value.

    But let’s assume an unlikely scenario that Apple net income is 40 billion in 2012.

    If a typical capitalization of 10% is applied to this net income, a value for the company can be estimated:

    40 billion / 10% = 400 billion.

    But to entertain all the promoter of apple stock let utilize a capitalization rate of 6%. The lower the capitalization rate the less risk involved with the investment, consequently a higher value.

    40 billion / 6% = 666 billion.

    I did not calculate that number on purpose. However it is interest. Maybe, apple stock price is associated with one of the deadly sins – GREED. It certainly appears to be.

    I acknowledge the capitalization rates are assumption, but historically a 10% rate is typically used by investors.

    By this analysis Apple’s market capitalization appear to be in excess by at least 265 billion.

    Now let get to the 1000 dollar a share price which every analysts and his brother are saying Apple stock will achieve in a relatively short time. This will mean that Apple as a company is worth a Trillion dollars with a the capital recovery of more than 25 years on the money invested as Apple’s net income will likely stagnate at 40 billion, due to the enormity of that sum.

    Apple’s income growth is beginning to slow, but this does not stop the analysts from developing deceptive forecast about Apples future growth citing its relatively low market share of worldwide computer, Smartphone and Tablet sales.

    One must ask who is paying these analysts for these deceptive forecasts. Could it be the herd on Wall Street which severely damaged the US Economy by all the financial instruments which were developed, supposably to limit risk, but were merely another device which allows them to hedge their bets? .

    It’s not surprising that the 70% of Apple’s stock is owned by institutional investors. Apple as company is a great candidate to collude on, due to its incredible growth rate over the last 5 years and the difficulty in evaluating its most important characteristic which is the marketing of its products.

    Marketing is an intangible asset, akin to Goodwill which is very difficult to evaluate There is a reason, Apple’s sales are less than its competitor which is due to their considerably higher cost, which in many cases are functionality no better than their competitors. But if you listen to the experts, it’s like Apple has no competitors or competing products which the consumer can choose, but can only buy Apple products.

    I have several apple products, including an ipad which is nothing more than an oversize iphone. The Ipad functionality and interface are significantly inferior to a lap top. The appeal must be to the herd, which is high on something and give them a convenient place to watch video as its utility is more like a toy than a useful device.

    If Apple wishes to capture more market share of sales it will require developing additional products with lower prices as the more affluent market have been saturated, leaving the less capable market the task of buying all though millions products which are forecast to be manufactured and sold by apple in the coming years.

    Just as computers, big screen TVs and many other electronic devices have been commoditized, so will apple products if they wish to generated more sales. This directly related to

    Apple’s value and alleged income growth potential. Guess what else is affected by a lower sale price? That right earning and net income will be lower, which is another reason Apple income will stagnate.

    I could go on about why apple stock is a bubble, but it would be in vain as the herd does not wish to sober up as the dope Wall Street is selling is that good. Maybe I need a toke.

  • Report this Comment On April 06, 2012, at 5:07 PM, deasystems wrote:

    I agree with your criteria, but in applying them to Apple, how the heck did you come up with a P/E of 21.83? That is wildly overstated, even at today's price per share.

    In fact, baring even faster stock price appreciation than we've seen recently, I expect the upcoming earnings results to cause AAPL's ttm P/E to drop even lower than the current 18 (not "21.83"!). Now factor in Apple's cash balance...

  • Report this Comment On April 06, 2012, at 10:50 PM, BWinski wrote:

    I tell ya what. You keep doing all this insane, ludacrios analysis, invest your money in instruments that yield you a solid 15% on your money and eat pumpkin pie the rest of your days... I'll stick with Apple over the next couple of years, earn over 100% EACH YEAR PLUS A DIVIDEND, and fly off in my G6 to the Azores...

  • Report this Comment On April 08, 2012, at 12:26 PM, TMFGalagan wrote:

    @deasystems -

    S&P Capital IQ normalizes earnings, and sometimes it's normalization techniques aren't obvious. But that's where the higher number comes from.

    best,

    dan (TMF Galagan)

  • Report this Comment On April 08, 2012, at 5:56 PM, secularinvestor wrote:

    ade61

    Why your sudden stream of long, hysterical, negative comments about Apple, it being in unsustainable bubble, advising everybody to get out? You wouldn't have made the mistake of shorting Apple, by any chance?

    Unfortunately, you are really utterly clueless when it comes to Apple. You say:

    "The herd believes that Apple can expand it sales by 20% a year for the next 5 years is a deception. To accomplish this apple sales will have to increase to 153 billion in 2012 and by 2016 and have annual sales of 318 billion.

    I don’t know how the herd can believe this fabrication. I guess they are smoking some good dope."

    The above comments just show how little you understand and know about Apple and the markets it operates in. In fact Apple has huge headroom to grow as the following facts show.

    Despite years of exceptional growth both the iMac and iPhone both still have have single figure market share of PCs and mobile phones respectively, leaving huge room to continue to grow market share.

    The iPad is in its infancy and has even more room to grow sales. It has revolutionised the tablet market. Almost all researchers agree that tablet unit sales will overtake conventional PCs (desktop and laptop) unit sales in just a few years. That means tablet sales will soon reach over 400 million units a year. The iPad is head and shoulders the best combination of hardware and software in the tablet market. The only way the competition can compete at all is to discount so deeply that they sell at a loss.

    Every user survey shows that Macs, iPhones and iPads have by far the highest user satisfaction and retention rates/ Macs and iPhones score over 75% satisfaction rates and the iPad an astonishing, unprecedented 96%. Consequently all three Apple classes of devices have by far the highest brand reputation and loyalty and can therefore command premium prices.

    All of this means that Apple will continue to gain market share with more than 90% of the markets still open to them.

    Macs, iPhones and iPads make up more than 70% of Apple's revenue and an even higher proportion of Apple earnings. Mac sales are growing at between 20% and 30% a year, while other PC sales are stagnating. Smartphone sales are growing at more than 50% a year and iPhones are growing at around twice that. iPads are growing even faster.

    So your assertion that Apple cannot continue to grow at over 20% is jus plain, ignorant nonsense!

    So you better close your shorts ASAP or you will be yet another victim of the Apple juggernaut!

  • Report this Comment On April 09, 2012, at 3:44 AM, 1984macman wrote:

    ade61:

    "Based on last year revenue and the prediction that sale will increase by of 20%, Apple’s net income will not exceed 40 billion in 2012."

    One small problem with your math: yoy, Apple's net income is already $33 billion. In two weeks, it's going to add nearly enough to reach the level ($40 b) you say it won't hit all year!

    Please return in two weeks and tell us you were completely wrong.

  • Report this Comment On April 09, 2012, at 6:48 AM, secularinvestor wrote:

    ade61:

    You seem to have misread what I said. I never said Apple's earnings would not reach $40 billion this year.

    What I did do was give the facts about Apple's market share which show that Apple has huge headroom to grow.

    As for earnings, Apple consistently beats analysts annual projections by huge margins, which is why the analysts keep raising their estimates. Their estimated 90 days ago for FY 2012 was EPS of $34.75. They have now raised that nearly 27% to EPS of $44.03.

    Apple will comfortably beat that $44.03. Bet against that at your peril!

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