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"Jobless Benefits" from Apple

January 15, 2009 | About:
Apple Around $50 /share Might be a Core Holding

NDQ:AAPL 2:30 PM EST price: $82.75

Could this be another example of our economy’s “Jobless Benefits”?

The news of Steve Jobs medical condition sent the shares of Apple tumbling after hours yesterday and in today’s regular session. AAPL shares have traded in a 52-week range of $79.14 - $192.24.

As of September 27, 2008 the company held almost $25 billion in cash or about $27 - $28 /share with no debt at all. Deduct $27 from the current quote and the business itself is selling for $55.75 /share. With trailing earnings of $5.36 for the FY ended last September that means AAPL shares are just over 10x operating earnings if you factor out their cash.

Worried about the “Jobs Report?”

Take a longer term view out to January of 2011 and sell a put or two at lower than today’s price.

Strike ….………..… Bid ……… Net Cost if Exercised

$60 ……………… $13.00 …………….. $47.00

$70 ……………… $17.50 …………….. $52.50

$80 ……………… $22.80 …………….. $57.20

While nobody can assure you that Apple shares will not be below your net purchase prices from the above list I can tell you that their shares have not traded hands below $79 since 2006. Even in 2006 the absolute low was $50.20 and EPS for the 2006 FY (ended Sep. 2006) were $2.27 or just 42.4% of FY 2008’s final number.


Disclosure: Author sold AAPL puts today as described above.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr. Paul Price's Website


Rating: 3.0/5 (5 votes)

Comments

batbeer2
Batbeer2 premium member - 5 years ago
Dear doctor,

IMO you are very focussed on price. You see, AAPL around $ 50 would by definition be a bad investment.

I for one require considder any company a core holding as long as it meets all of the following requirements:

- Good and cheap management (BRK)

- Highly predictable and noncyclical earnings (HB)

- Barriers to entry built into the business (BNI)

- High gross and net margins (MCO)

- A rock solid balance sheet (ZINC)

- No new capital required for growth (KO)

- A small market share to start with (HMC)

Needless to say, I'm still looking for that one. If I find it or anythung that comes close, I would be willing to pay double digit normalised p/e.

Most stocks, at a low enough price would be a good investment. AAPL may be a great investment at $ 50; but what is it that so attracts you in AAPL as to considder it a core holding.

As I see it, the recommendation boils down to:

"This icon must be cheap at $ 50; the last time it traded that low, was a long time ago"

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
Batbeer2

Is that why you loved ZINC at $8 last August? For its highly predictable earnings?
batbeer2
Batbeer2 premium member - 5 years ago
In all fairness..

1) I editted my post and removed a refference to Steve Jobs.

2) I still think ZINC might do fine. I had worse ideas in 2008. I think I disclosed that I held no position then but I like the fact that they are investing at this time. A lot of cash on the balance sheet is only worth what management is able to do with it. They are now doing something with it. Time will tell if they are doing wise things.

Now instead of correctly identifying me as a terrible stock picker, could you share something on Apple - the business that is, not the stock - that attracts you to it.
Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
Apple is the biggest seller of music downloads in America, owns the dominant MP3 format [iPod] and has been making progress in gaining market share for its MACS and Notebook computers.

They have zero debt and about $25 billion in cash.

They earned an all-time record $5.36 /share in the FY ended last September. Since 2003 here are their FY earnings per share numbers:

2003 ..... $0.10

2004 ..... $0.36

2005 ..... $1.44

2006 ..... $2.27

2007 ..... $3.93

2008 ..... $5.36

Seems like a great growth picture to me.

Average P/E over the past 5 years has been 29.9x (higher than I would consider).

At the break-even points for my various puts, however, the P/E on a forward estimate of just $5 [which assumes dreadful consumer spending for 2009] ranges from 9.5x - 11.5x (a level I think is quite cheap- especialy if you take their cash holdings into account).

A market leader, cash rich, debt free, and solidly profitable at around 10 times earnings meets my criteria for a decent risk/reward.

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
HEARD ON THE STREET JANUARY 17, 2009

By MARTIN PEERS

The biggest surprise this week was not that Steve Jobs has to go on medical leave. It was that the shares have dropped only 3.5% since the chief executive and architect of Apple's revival disclosed his news.

The reason: Apple stock already had lost the Steve Jobs premium. It already was near a 52-week low due to recessionary worries and speculation about his health. Now, on some measures, Apple is valued below rivals such as Hewlett-Packard and Dell.



Apple CEO Steve Jobs is taking a medical leave of absence until the end of June.

Apple's enterprise value is roughly six times free cash flow from the past 12 months. That compares with H-P on about eight times and Dell on 8.5 times, according to Barclays Capital analyst Ben Reitzes. Apple looks pricier on a price-earnings basis: 15 times trailing 12 months against roughly seven to 10 times for Dell and H-P. But some of Apple's premium disappears when earnings are adjusted for Apple's policy of recognizing iPhone revenue over two years, rather than when the cash comes in the door.

Even assuming the worst -- that Mr. Jobs doesn't return to his post -- the stock should trade above its peers. It has an unbeatable brand name in technology and a diversified product lineup. Even though its products are high-end discretionary purchases, making them vulnerable to a nasty recession, Apple has broadened its range to include lower price points.

Majestic Research, which tracks Apple sales, reported Dec. 22 that holiday season demand, particularly for the iPod and laptops, had been resilient. On Wednesday, Apple's December quarter results will clarify the business picture. Mr. Jobs's future will remain uncertain. But right now, Apple looks like a bargain

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