Apple (AAPL +1.77%) has been trading at a notably low multiple since 2009.
In this clip from Industry Focus: Tech, Fool analyst John Rotonti explains a few reasons why the company is trading so low, and compares its reputation in the market to the similarly valued biotech Gilead Sciences (GILD 2.19%). Find out why these companies are such exciting prospects for value investors, and one huge concern that's still up in the air for both of them.
A transcript follows the video.
This podcast was recorded on July 1, 2016.
Dylan Lewis: Why don't we hit Apple first? Forrest Gump's favorite fruit company, it's one of those stocks that have been perpetually cheap since about 2009. They're currently at a trailing P/E [price-to-earnings ratio] of about 10.5, roughly half that of market right now. When you're looking at this company, what makes them a value investment for you, John?
John Rotonti: Dylan, I love how you teed it up, because you said it has been perpetually cheap since about 2009. Which means that, maybe I'm missing something. Maybe the market's right. It's definitely possible, it's happened before and it will definitely happen in the future. I guess the question is, and, it's a question that value investors struggle with a lot -- is something cheap, is it undervalued, or is it a value trap?
When I think about Apple, actually, I see a lot of pattern recognition with another company trading at a low multiple of earnings, which is Gilead. I know Gilead technically it's not tech, but it has tech in its industry title, because it's biotech, so I'll bring it up really quickly. From a pattern recognition standpoint, both Apple and Gilead have super strong balance sheets, both have generated a ton of free cash flow, have high returns on invested capital. Both have super high market share. Apple has about 14% share of the global smartphone market, but it generates more than 90% of industry profits. Gilead has about 70% market share of the HIV market, and 90% share of the hepatitis C market in the U.S. So, really established dominant businesses. Both have what I believe to be high-quality management teams. Both pay an almost identical dividend that yields 2.3%. And both are statistically optically cheap, trading at less than 10 [times] enterprise value to free cash flow.
But, on the other hand -- and here's more similarities, and these are big buts -- both generate a majority of the revenue from one or two products. For Gilead, I think 90% of its sales come from its treatments for hepatitis C and HIV, and for Apple, I think the iPhone accounts for about two-thirds of its sales. Both do not have a lot of revenue diversity, both are facing slowing growth, and both are facing some degree of pricing pressure. So the question is, are they good investments? Are they value traps? I admire both companies. I actually prefer Apple, and I'll talk a little bit more about Apple, primarily because I just understand it better. At this point, I have not really dived into Gilead's pipeline. I don't yet know how to value it. So it's high on my watch list, but I'm focusing on Apple, and I have an investment in Apple.
