With Apple (AAPL) roaring back toward its December 2013 / January 2014 highs, a familiar debate has broken out over what constitutes a reasonable valuation for the technology colossus. This debate has raged in the market for years and has recently spread to the MarketIntelligenceCenter.com offices. The essential question is this: should Apple be viewed as a large, innovative technology company with impressive growth prospects, diverse revenue streams, increasing online sales, new products in the pipeline and, very likely, tricks up its sleeve that we don't even know about, or should it be viewed as, essentially, a durable goods manufacturer with an attractive market position selling an item nearly all consumers need, but which nearly all consumers already have, another of which they almost certainly won't buy until the one they have breaks? To put the question another way, is Apple more fairly grouped with companies such as Google (GOOG) and Amazon (AMZN), or with… Whirlpool (WHR)?
For easy reference, here are the trailing P/E ratios of the four companies, arranged from lowest to highest. Also included is the PEG ratio for each company, which is the P/E ratio divided by the company's expected 5 year growth rate.
Apple 13.29 0.63
Whirlpool 13.59 0.53
Google 31.07 1.37
Amazon 594.22 4.12
The numbers indicate that the Street sees Apple and Whirlpool as companies deserving very similar valuations. That valuation is less than half what the Street is currently assigning Google, and forget any comparison to Amazon. Interestingly, the PEG ratios indicate that of the four companies, the most undervalued of the group is not Apple, but Whirlpool. All of these, of course, are quick and dirty measurements that leave out a great many pertinent factors.
For example, Apple's revenue growth in 2013 was 9%, driven by a 16% gain in iPhone sales and a 25% gain in revenue from iTunes, whereas Whirlpool's revenue grew at 3.4%. Then there is the international market; Apple has just signed major deals to begin selling iPhones in China, with its more than one billion mobile phone users. Whirlpool, on the other hand, projects only 3% to 5% growth in 2014 in shipments to both Asia and Latin America.
The most significant distinction between the companies, however, is in their profit margins. Apple's profit margin is 21.28%, which beats Whirlpool's profit margin of 4.41% hands down, clobbers Google's 8.53% margin, and slaughters the 0.37% profit margin at Amazon (granted Amazon tends to view profits as proof it hasn't expanded as aggressively as it should have).
The Street's valuation of Apple is too low primarily due to its underestimation of the power of all that money Apple is making to return value to shareholders. Even when, as it has seemed in the past two years, Apple's growth is limited by the number of humans in existence, it can shower cash on its shareholders in the form of large dividends, as it has in the past, or drive up the price of its stock with enormous share buy-back plans, as it is doing right now.
With AAPL stock trading at such an exceptionally low valuation, there are few other stocks that offer such tremendous potential for total return, and for the wise investor, total return is the name of the game.
Editor's Note: Julian's opinion on this matter is not universally held.
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.