What: Shares of technology behemoth Apple (NASDAQ:AAPL) had their worst day in four weeks on Wednesday, shedding $3.38, or 2.6%, to close at $128.79 in spite of the fact that research firm Stifel Nicolaus substantially increased its price target, or perceived fair value, of Apple's stock.
So what: According to a research note released by Aaron Rakers -- the covering analyst at Stifel Nicolaus who reiterated a "buy" rating on Apple and boosted his firm's price target to $150 from $130 -- Apple's "platform effects," its ability to expand into foreign markets such as China, its army of loyal customers, the rise of mobile payment solution Apple Pay, and select tax advantages all support further upside in the stock.
Per Rakers, Apple's enterprise value to free cash flow is a "reasonable" multiple of 11.7 if Apple generates $52.5 billion in cash flow, or a multiple of 10.2 if Apple generates $60 billion in FCF. Further, Rakers foresees Apple boosting its dividend payments to $13.5 billion-$14 billion annually, working out to an annual payout of $2.30-$2.40 per share and a yield of 1.8%. Apple stock currently yields 1.5%, according to S&P Capital IQ data.
Additionally, Rakers notes that while he and his firm are no tax experts, Apple should be able to find ways to lower its tax rate on "indefinitely reinvested" overseas profits. Apple currently has nearly $70 billion in total foreign profits indefinitely reinvested in ex-U.S. markets, and Rakers suspects that if Apple changed the way in which it accounts for foreign earnings it could reduce its effective tax rate down to 20% from a modeled 26%. Rakers believes this would work out to a 7% boost in Apple's full-year EPS.
Now what: What investors really need to do after Rakers' long research note is try to determine whether Apple has the tools capable of fueling its share price to $150.
With Apple unquestionably the largest company in the world by a mile, there are obviously valid arguments for each side.
Pessimists would point to the fact that Apple shares have had meteoric rises before only to sputter out. Also, Apple is very much an iPhone company at present, and while it's transitioning to becoming a platforms company via Apple Pay, the Apple Watch, and perhaps even an Apple car, there are risks to having a majority of its income tied to a single product.
The flip side to this argument is that loyalists absolutely love Apple's iPhone. One need only look at the line outside of Apple's stores on the day of release for evidence of this. In the latest quarter Apple sold 74.5 million iPhones, and it realistically could sell in excess of 200 million annually over the next couple of years. It's really hard to argue with a growing cash balance and the likelihood of increased shareholder incentives.
Personally, I fall into the bull camp, but I'm also not expecting Apple to keep up its torrid pace of stock appreciation. I believe Apple could make up a core long-term holding, but I'd suggest that averaging into Apple a little here and there is probably the smartest approach.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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