1 Analyst Gets Bullish on Apple

Raymond James analyst Tavis McCourt seemed slightly fed up. Sentiment for Apple (NASDAQ: AAPL  ) stock is "horrible, in the institutional investor community, and ultimately we view this as feedstock for outperformance," he said. Upgrading his rating from outperform to strong buy, McCourt reiterated his $600 price target for the stock on Monday. Could McCourt be right? After all, $600 is a pretty hefty premium to today's prices.

What's next in mobile computing?
McCourt calls it phase two: When the growth of smartphone and tablet markets begins to subside, and smartphone chipsets and ecosystems start invading televisions and automobiles, and gaining "uses not currently thought of for computing devices." With the help of its vertical integration, McCourt believes that the Cupertino-based tech giant is positioned to take a large share of industry profits as it enters the second phase of the "mobile computing revolution." 

Valuation matters
All of this sounds great, but aren't there plenty of other companies positioned to benefit from this second phase, too? Vertically integrated or not, $600 is a lofty target.

McCourt's $600 price target isn't a random bullish target. In fact, it's not too far from the average analyst target of about $539. McCourt is simply being objective. The stock is cheap, he argues. He sees the Street's negative sentiment toward Apple as a good thing -- poor expectations are mostly already priced into the stock. In order for the stock to take a major hit, he explains, "trends at Apple would have to erode meaningfully." 

Just how cheap is Apple?
Using a reverse discounted cash flow valuation, and a 10% discount rate, the growth rate assumed by the market for Apple's free cash flow going forward is just 1.4%. In other words, at today's price for Apple's shares, the market expects competition and eroding margins to prevent the business from growing even at the historical rate of inflation.

To add some context, it's useful to compare Apple with another megacap cash cow: McDonald's (NYSE: MCD  ) . Ironically, Apple and McDonalds share some common characteristics as stocks. Like Apple, McDonald's growth seems to be slowing. In the company's first quarter, global comparable sales decreased 1% from the year-ago quarter. Revenue increased just 1%. Furthermore, the stock's dividend yield just barely tops Apple's; both are close to 3%. 

As far as valuation goes, however, Apple and McDonald's are as different as night and day.

Valuation Metric

Apple

McDonald's

Free cash flow growth rate assumed by the market

1.4%

17.4% 

Price/free cash flow

8.9 

25.5 

Price/forward earnings

9

15.6 

Why is McDonald's stock so much more expensive than Apple's? Chances are it's because the market is confident in McDonald's cash flow going forward. Apple, on the other hand, may leave investors nervous. Investors are asking tough questions: Can the company sustain its meteoric levels of free cash flow? How much further will the company's margins continue to fall?

But is Apple truly deserving of a valuation so inferior to McDonald's? The company's conservative valuation levels the playing field, making the stock's risk/reward profile a convincing value proposition. The market's serious concerns are arguably already priced into the stock.

The price for Apple stock is awfully cheap. Does this mean the stock is going to immediately appreciate? No. But if there is an undervalued company in the S&P 500 that looks likely to earn investors solid returns over the long haul, Apple definitely fits the bill.

With expectations for Apple stock so low, the market has seemed to largely forget about Apple's history of cranking out revolutionary products... and then creatively destroying them with something better. Does this mean Apple can never pull it off again? Or is Apple still capable of disrupting markets? Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.


Read/Post Comments (3) | Recommend This Article (6)

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 July 04, 2013, at 12:41 PM, iphonerulez wrote:

    The whole tech sector is making me sick. Google having a share price of more than twice Apple's share price is more than I can tolerate. Not to mention Netflix is more than half of Apple's share price and they claim these companies are not overpriced. Forget being able to purchase stocks based on fundamentals. Just buy what the hedge funds are buying, that's it. Even if the company is no good they'll make it seem like it's a money-making powerhouse. Apple appears to be the only tech company around that makes investors nervous when it comes to future cashflow. I guess everything valuable about Apple is tied to the iPhone.

  • Report this Comment On July 04, 2013, at 12:54 PM, DanManners wrote:

    I appreciate your article but David Trainer already said Apple is going to 240. How can you argue with him. His facts are indisputable.

    David Trainer is the number one analyst in my mind. He is a genius. Apple will be at 240 soon. Apple's cash flow would have to dry up and I guess that is what is about to happen.

    The iphone5s will be another disaster. What happened after the iphone5 came out? Apple dropped 315 points. Now with the 5s, Apple wont drope the same number of points but 240 is reasonable as a price target.

    I would recommend staying away from this disaster until Tim Cook is replaced.

  • Report this Comment On July 05, 2013, at 1:05 AM, SimchaStein wrote:

    The Trefis (dot com) model has a $635 price target.

    The biggest reason to be bullish is that the low price increases the number of shares that Apple can buy back with its $60B buy back.

    It simple - win / win. If the stock tanks, more EPS after buy back. When the stock goes up you get 3% yield plus the growth.

    Are there any better stock picks?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2522534, ~/Articles/ArticleHandler.aspx, 11/27/2014 11:24:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement