After Apple (AAPL -1.07%) reported first-quarter results in late January, the stock fell to a 52-week low of $92. Shares were looking particularly attractive after the sell-off. But the stock has since rebounded to above $100, trading at about $102 at the time of this writing. Is the stock still a buy at these levels?
Valuation
A quick glance at Apple stock would likely lead most investors to agree that shares appear to be cheap. Of course, a cheap-looking stock isn't always a great investment. A conservative valuation should be paired with a solid business before it starts to look like a good investment candidate.
Nevertheless, valuation is not only a great starting point -- but its an essential element to consider when making any investment.
On this note, two metrics, in particular, highlight undervalued nature of Apple stock.
Price-to-earnings: While a price-to-earnings ratio isn't always a useful barometer for gaining insight into a stock's valuation, it does provide perspective for matured businesses. For companies with a stable level of operating expenses as a percentage of revenue, and fairly consistent gross profit margins, a price-to-earnings ratio provides a window into the market's sentiment toward a stock's growth prospects.
Apple's P/E ratio of 11 is notably low. A P/E ratio this small essentially assumes Apple's EPS over the long haul may barely outpace inflation. For reference, the market has awarded the average stock in the S&P 500 with a much higher P/E ratio of 23 -- more than double Apple's
Free cash flow yield: Another way to look at Apple's valuation is to consider the company's free cash flow yield. Free cash flow yield refers to the cold hard cash generated from regular operations less capital expenditures as a percentage of market capitalization. The higher Apple's free cash flow yield, the more conservatively the stock is valued.
Apple's free cash flow yield is nearly 11%, near the highest levels it has been in the last five years -- and well above other tech giants such as Microsoft and Alphabet, which have free cash flow yields of about 6% and 3%, respectively.
AAPL Free Cash Flow Yield (TTM) data by YCharts
2 big catalysts for growth
So, Apple stock appears cheap by traditional valuation metrics. But is its business about to spin into a decline? After all, with Apple guiding for a year-over-year decline in revenue for the current quarter, the tech giant's new iPhone 6s lineup looks poised to fail to outsell its iPhone 6 lineup from the year prior.
Fortunately for investors, there are two key reasons Apple's EPS should be able to continue to grow at rates beyond inflation over the long haul.
1. Share repurchases. With more than $1 of $5 dollars of Apple's revenue consistently making it to the company's bottom line, the tech giant should be able to continue to repurchase its own shares aggressively for years to come. As long as the stock trades conservatively, these repurchases will build shareholder value and boost EPS.
2. A loyal customer base. Apple is known for its loyal customer base. This reality is illustrated both by high levels of customer satisfaction for its products and Apple's industry-leading pricing power across all of its product categories. And loyalty does more than retain current customers. It helps with growth, too, since new customers are more likely to stick around with Apple's brand and buy future products than new customers to a less loyal brand would be. In other words, Apple can more likely retain the leftover customers from less-loyal brands if those users try Apple products.
Other potential catalysts for Apple include low penetration of LTE devices in large, but still emerging markets like China and India, strategic acquisitions that could be made with Apple's huge cash hoard, and potential for consistent dividend increases for years to come.
So, is Apple stock still a buy? With a valuation this conservative and a range of reasons to believe the tech giant can still grow EPS, I think so.
