Fact: Apple Got Cheaper Last Week

Apple (Nasdaq: AAPL  ) shares may cost more than they did a week ago, but that doesn't make the stock more expensive.

Confused? Stick with me. I promise that this will make sense soon.

Shares of the world's most valuable company climbed 5.2% last week, reversing a lot of the damage done during the two prior weeks of stinging declines. However, Apple's earnings multiples -- both trailing and forward-looking -- have actually improved over the past week.

Let's start with Tuesday night's quarterly report. Apple's fiscal-second-quarter profit of $12.30 a share made headlines by blowing past the $10.04 a share that Wall Street was expecting. More importantly for our purposes, it replaced the $6.40 a share that Apple earned during the same fiscal period a year earlier.

In a split second, Apple's trailing earnings -- the sum of its profitability over its past four quarters -- soared 17% from $35.11 to $41.01. What happens to a trailing P/E ratio when earnings growth outpaces a stock's capital appreciation? It gets cheaper.

At a price of $603, Apple closed at a trailing earnings multiple of 14.7 on Friday. A week earlier, Apple closed with a higher P/E of 16.3 even though the stock was at $572.98.


It gets neater.

Future shock
As analysts realize that they have vastly underestimated Apple's earnings potential -- something that has happened every quarter for years outside of a single report six months ago -- they also begin to tweak their outlooks higher.

Obviously analysts have to do this for fiscal 2012. They missed on the bottom line, on average, by more than $2 a share! However, in tweaking this fiscal year's model, they can't just leave fiscal 2013 and beyond the same. Why should a company that's growing faster than they expected suddenly be growing slower than they were originally forecasting for the following year?

Over the past week, the consensus estimates for Apple's earnings in fiscal 2012 and fiscal 2013 have rise 5.6% and 6%, respectively.

See how the forward estimates climbed marginally higher than the stock's 5.2% ascent? Yes, that's Apple getting cheaper.

Apple now trades at 12.9 times this fiscal year's per-share target of $46.87 and 11.2 times next fiscal year's target of $53.93 a share.

The moral of the story is that Apple did get cheaper last week. Feel free to point that out to the person who thinks that Apple's stock ran away from them last week. The only thing that ran faster than the stock last week -- thankfully -- is the stock's profitability.

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Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2012, at 12:04 PM, 1984macman wrote:

    There are actually two forces at work compressing the P/E ratio. The exponentially-growing shot to the E part of the equation is one force. Some of us have been warning about this issue literally for years. The options-based gambling with the P part is the other. Travis Lewis brilliantly explains how this second force works:

    The net result is huge volatility and totally undeserved P/E compression for AAPL.

    AAPL isn't just cheap: It's ridiculously cheap. Absurdly cheap. And as of today, with the price substantially under $600, insanely cheap.

  • Report this Comment On April 30, 2012, at 12:19 PM, sikiliza wrote:

    See, I don't agree with this whole PE argument. That because Apple PE is low, then it is cheap. That cannot be further from the truth.

    PE ratio = the price that an investor is willing to pay for every dollar or earnings. If those earnings are potentially volatile (for example if the iPhone 5 were to flop) then the PE ratio would not factor that in.

    GE has a PE of 16 and AAPL has a PE of 14.5, ergo, Apple is cheaper. Ha! Well, GE has long term contracts around the world that will keep the revenue coming in and further it is super-diversified. AAPL depends on three products that are truly speaking, faddish, even though rather useful (i'm a mac user and have had a couple of iPhones). If any of those products doesn't do well or lose their luster to say, er, the Lumia 900, voila, earnings miss, and the exit doors suddenly seem too small for investors trying to get out.

    I don't buy the PE argument. Sure PEG is low but so is the PEG for that of a myriad other companies.

  • Report this Comment On April 30, 2012, at 5:51 PM, EquityBull wrote:

    Cheaper today...down 20 points almost to 583. 3.15% slide.

    PE has compressed because analysts have mistakenly estimated out year growth at just 10% so street puts PE of 10 on it. Each quarter they ratchet up current and out years but don't put enough growth on the out years.

    For example did any analyst last year model 90% plus growth for 2012? Now they are modeling 10%. IF they never ratchet up out years and analyst estimates are what everyone uses to model valuation then apple will be forever doomed to trade at a 10x multiple.

    What should apple do? Defend the stock. Issue a 50 billion buyback authorization and start buying hand over fist. At their growth rate and the low stock multiple they are buying dollar bills for 10 cents. Or they could just keep the cash in the bank earning < 1%. Apple great at products. Horrible at managing cash and their stock.

  • Report this Comment On May 01, 2012, at 1:33 AM, ade61 wrote:

    People have been accusing me of being an Apple Hater. My commentary has nothing to do with Apple products. I have iphones, Ipad and ipods the products are fine. But to say Apple products are significantly superior to other electronic devices would be a lie. I have been providing my comments so people will think before making a stock purchase they may regret. I believe I am reasonably intelligent. So should I just believe all the analysts forecast about Apple stock are would a prudent person investigate before purchasing an asset to insure it is properly valued. I realize my insignificance in this world and know it is short-lived. However, I do believe in integrity and I do not see much of it on display on Wall Street. Considering the majority of Apple’s Stock is owned by institutional investors, I believe it has been manipulated based on future earnings growth which is overly optimistic.

    Apple’s last quarter net Profit of 11.62 billion and increases of 11% to 31% on earning is very suspect, considering the fact Apple’s 2007 net income was 3.5 billion. So if the recent reported earnings are accurate, which I doubt that will mean Apple's net income for 2012 will be approaching 40 Billion which will be about 1150% from 5 years ago. I don’t know of any company in the history of the world that has had that type of growth, it’s unbelievable.

    Apple cannot continue to grow its sales and earnings at over 200% a year and is likely hitting the top of the bell curve? If the sales numbers are accurate then apple is manufacturing at least 340,000 Iphones a day. Their product will become commonplace, they are definitely overpriced with that kind of production rate and will lead to a price cut as currently Apple products are unaffordable to the world mass population.

    Time will tell who is right, if the analysts or me.

    I have reviewed the numbers and can see the waning appeal of apple in the United States which will likely spread to the rest of the world. Apple net profit will stagnate at 40 billion, maybe 50 billion. For God Sake they are just smart phones, and the Ipad is nothing more than an enlarged iphone.

    If I am wrong I will acknowledge my error, will the analysts. I doubt it.

    For more of my comments on Why Apple Stock Price is a bubble

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