This Just In: Deutsche Bank Says It's Time to Buy Apple Inc.

At just $530 and change, Apple is poised to go on a 22% run, according to Deutsche.

Apr 10, 2014 at 1:00PM

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
You wouldn't know it from the stock's wobbly performance this morning, but shares of Apple (NASDAQ:AAPL) just got a big vote of approval up on Wall Street, where international megabanker Deutsche Bank has initiated coverage with a buy rating.

Cited on StreetInsider.com this morning, Deutsche laid out a raft of reasons for expecting Apple stock to outperform the market, including Apple's:

  • "dominant position in smartphones and tablets";
  • "robust ... high teens" growth expected in smartphone unit sales;
  • even greater "mid-20%s" growth in sales of tablet computers; and
  • "products [that] represent the gold standard" for tech consumers in both categories;

Deutsche also noted that Apple could see further growth in new product categories such as smartwatches, Apple-branded televisions, and "connected home" products as the Internet of Things comes into being. Defending its prediction that the company will outperform its fellow techs, along with the stock market at large, Deutsche argued that "Apple still has the ability to 'surprise and delight' its customers, therefore any new and successful product would provide upside to the company's already above-market growth rates."

But is Deutsche right about that?

Let's go to the tape
Over the nearly eight years that we've been tracking and recording this analyst's performance, we've seen Deutsche get the majority of its stock picks right -- and its average recommendation beat the market by more than 8 percentage points. A bit of a hit-or-miss investor in the topsy-turvy world of tech investing, Deutsche Bank has nonetheless picked quite a few major winners en route to earning a sterling 94% rating on Motley Fool CAPS:

 

Deutsche Bank Said:

CAPS says (out of 5 stars possible):

Deutsche Bank's Picks Beating S&P By:

SanDisk

Outperform

***

193 points

Western Digital 

Outperform

****

205 points

Apple

Outperform

****

440 points


Obviously, it's that 440-point outperformance on Apple stock in particular -- counting from a recommendation first made back in January 2007 -- that really gets me thinking that Deutsche knows what it's talking about when it tells investors to buy Apple today. But the banker's strong record of making prescient recommendations in key computer parts suppliers SanDisk and Western Digital is also encouraging.

Apple: buy the numbers?
No less encouraging is the valuation of Apple stock, which I have to say looks so attractive as to make Deutsche's recommendation to buy almost a no-brainer. Valued on generally accepted accounting principles-calculated profits, Apple shares sell for just over 13 times earnings -- and at a significant discount to the triple-digit P/Es more commonly found in the tech sphere these days.

What's more important to me than Apple's earnings per se, though, is the quality of these earnings. In a world where companies often report strong GAAP profits, but have much weaker or even negative free cash flow backing them up, Apple is that rare bird that generates more cash than it is permitted to describe as "net income" under GAAP -- $45.1 billion in trailing free cash flow, in fact, versus reported income of only $37 billion.

That 22% differential between free cash flow and GAAP profits coincidentally tallies nicely with the undervaluation Deutsche said it sees in Apple shares. Turns out, a move from today's share price of $530 and change, to Deutsche's projected target price of $650, would be a bit more than 22% itself.

Foolish takeaway
At a price-to-free cash flow ratio of just 10.5, and an enterprise value-to-free cash flow ratio even lower, Apple shares look bargain-priced for analyst projections of 21% annual earnings growth. Today, Deutsche Bank became one of the first Apple skeptics to conclude these shares have become too cheap to not own. I predict it won't be the last.

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Rich Smith owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Western Digital. 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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