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Visualizing the Value in Apple Stock

Daniel Sparks
September 5, 2013

With Apple (NASDAQ: AAPL) trading near $500 again, it's time to return to the drawing board and look at the King of Cupertino's valuation. As it turns out, Apple still looks tasty at $500.

Low expectations haunt Apple's stock
The market is a forward-looking mechanism, and when it comes to Apple, the market's forward look accounts for little (if any) growth in the company's bottom line beyond inflation.

Assuming investors require a 10% return on their investment in order to take the risk of investing in the stock market, a P/E of 10 suggests that the market believes a company's underlying earnings growth will not outpace inflation.

With Apple trading at a P/E of 12.5, it's easy to see the Street has low expectations for the company's EPS growth -- even despite its massive share repurchase program. Even at $500, investors' expectations for Apple paint a very gloomy picture when compared to other megacap cash cows: Google, Procter & Gamble, McDonald's, and Wal-Mart.

Source: Morningstar.

Relative to free cash flow, Apple looks even cheaper.

Source: Morningstar.

The story gets even more confusing when you take into consideration Apple's free cash flow yield. A free cash flow yield refers to the percentage of every dollar of sales a company is able to convert into free cash flow. 

Source: Morningstar.

Despite Apple's uncanny ability to turn a quarter of every dollar of sales into free cash flow, the market refuses to give the stock a premium.

The same story prevails when you compare Apple to all of its peers in the <