Full Disclosure Finance

By Andrew

In my previous post about the recent decline in Apple shares I noted that I was looking into starting a small position. On Thursday January 24th I bought 10 shares of AAPL at an average purchase price of $134.00 per share. At the current levels the stock is trading at a Price-to-Earnings ratio of 28.5 times trailing earnings and 20.7 times forward earnings, which is very reasonable considering the company’s growth rate. In 2007 Apple grew revenue by 24% and net income by 76% year-over-year. In 2008 earnings are forecast to grow by nearly 31%, which means that the stock is trading below its forward growth rate. As of the most recent quarter the company had over $18 billion in cash on their balance sheet and no long term dept. This gives the company room to continue to innovate and run business as normal even if sales slow because of weakness in consumer spending. A load of cash with low debt is key for a company in a slowing economy. The company reported gross margins of 34.7%, up 31% from the year-ago quarter, which are outstanding compared to the industry average. Apple has beat analyst estimates every quarter for the past 13 and is averaging a 26% earnings surprise (difference between expected and actual earnings) over its last six reported quarterly figures.

The stock is down nearly 35% in less than a month, which has created the best buying opportunity in AAPL that we’ve seen for some time now. Apple is still growing at a rapid clip and seems cheap to me at these levels. There is a lot of negativity surrounding the stock right now and it may trade lower in the short term, but at this valuation I believe that the upside is much greater. People who are obsessed over iPod numbers are missing the big picture. The iPod halo effect is steadily allowing Apple to accumulate market share in PCs, software (Leapord), and now cell phones. In my opinion the stock has been unjustly beaten down and the risk/reward was just too good to pass up. Let me know what you think about AAPL.