The following three technology mega cap stocks are considered to have low price to earnings ratios because they are selling below 15 times earnings. These stocks are all very well-known and highly traded. This article fundamentally discusses the main drivers behind these stocks and where these stocks might trend in the near future.
Apple (AAPL, Financial) currently has a trailing price to earnings (P/E) of just below 15 with a forward rate of close to 11. Its PEG ratio is about 0.6, its price to sales is 3.66 and its price to book is 5.2.
Apple’s operating cash flow has incrementally grown over the past ten years. The year-over-year growth into the years 2009, 2010, and 2011 was 5.9%, 83%, and 101%, respectively. The free cash flow also incurred similar growth in the corresponding years but due to a larger increase in capital expenditures, the growth into 2011 was slightly less at 82.6%. When looking at the statement of cash flows, the main reason why Apple is not annually increasing its cash balance is that it chose to use a substantial amount of cash on investments. The 2011 cash used in the purchase of investments was almost 80% higher than in 2010. Even more has been spent into 2012 when considering the trailing-twelve-month (TTM) reports. If Apple were to have used the same amount spent on dividend distribution as it had on investments, shareholders would be looking at a $109.19 per share dividend. Of course, Apple would likely not distribute a 21% dividend. This relationship is meant to highlight its ability to pay. Even a fraction of cash invested would amount to a substantial dividend payment. I think that many investors are looking for an eventual dividend from Apple. However, it seems that Apple is still highly concerned with growth and will therefore invest much of its excess funds.
It is no secret that Apple is exceptionally profitable. First and foremost, revenue has been trending sharply upwards for the past several years. 2011’s reported revenue was 66% higher than in 2010 and it has shown even more improvement, being that the TTM revenue is now 18% higher than in fiscal 2011. Also, margins are doing well. Both the operating and net margins have shown a steady year-over-year improvement into 2011. In 2009, 2010, and 2011, the operating margin was 27.36%, 28.19%, and 31.22% and the net margin was 19.19%, 21.48%, and 23.95%, respectively.
Apple will soon introduce two new versions of already enormously successful products. The iPad 3 is coming out and is expected to perform better than the iPad 1 and 2. This is suggested because the iPhone 4S outsold very successful prior models. Also, the iPhone 5 will be coming out soon and will expectedly outsell its earlier models.
I don’t see much stopping Apple. Its enormous size creates benefits from economies of scale. Its growing capital contribution to research and development is working towards improving existing products and creating new innovative additions to its line. Its surge in investment related cash usage will expectedly further grow equity. Its profitability is in pristine condition. I think that most investors don’t see $500 as a selling price. If Apple can continue to grow profitability, the stock price will continue grow at its current rate.
International Business Machines (IBM, Financial) has a trailing P/E ratio of 14.8 and forward P/E of 11.75. It has a PEG ratio of slightly above 1 and price to sales of 2.1 with a price to book of 11.14. IBM also pays a $3.00 dividend at a 1.6% yield with a 22% payout ratio. This is slightly below the five-year average of 1.8%.
Over the past decade, IBM has undergone significant transformation. It has gone from a provider of discrete hardware products to a supplier of integrated business solutions. IBM’s hardware segment went from consisting of 40% of total revenue in 2000 to less than 20% at its current levels. It recognized that these businesses had shrinking margins and decided to go another route.
IBM has incrementally grown all margins over the past several years. From 2005 until 2010, IBM grew its gross, operating, and net margins by 15%, 76.6%, and 70.5% to 46.07%, 18.17%, and 14.85%, respectively. During this same timeframe, revenue grew by 9.6% while net income grew by 87%. This explains the increased margins. Most recently the TTM revenue grew 6.6% larger than in 2010 and the net income grew an additional 5.3% during the same period. Further concerning profitability, IBM has a huge return on equity (ROE) of just over 73%. However, it also has a debt to equity of 154.78%. This skews the optimistic size of the ratio. The return on assets (ROA) is a more modest 11.63%.
It is expected that IBM’s revenue growth will come from software and services, which are high-margin sources. This will in turn further drive margins upward. If revenue is driven in such a way, net income will increase at an even larger rate and I would expect the price to trend with earnings. I believe that 15 times earnings is a healthy multiple for IBM. If EPS were to grow, I believe the price will rise in unison to maintain such a multiple.
Microsoft Corporation (MSFT, Financial) has a trailing P/E of 11.4 and a forward P/E of 10.52. It has a PEG ratio of 1.38. It has a price to sales of 3.64 and a price to book of 4.08. Microsoft also pays a $0.80 annual dividend at a 2.6% yield. It has a modest payout ratio of 25%. This dividend trends in a positive fashion as the yield is above the five-year average of 2%.
Microsoft recently reached a new high of $31.55 on February 16. It is currently trading slightly below that high. Microsoft is commonly known as a company that is very profitable with hardly any debt. Microsoft’s ROE is roughly twice that of its 20% debt to equity ratio.
Over the past ten years, Microsoft’s per share dividend has incrementally increased while shares outstanding have trended on an incremental decline. Net income grew by 64.6% from 2007 into 2011 with a 36.1% dividend payment increase during the same period. Also during this period, operating cash flow increased by 51.7% while free cash flow simultaneously increased by 58.6%. The repurchase of shares has shifted over the last five years. 2007’s $26.6 billion share repurchase was 139% higher than in 2011. The 2011 cash usage to repurchase shares was more than twice of what it used to pay out dividends but much of the repurchase occurred in the beginning of the year because the TTM cumulative dividend payment is now 12.7% higher than the TTM repurchase. If Microsoft continues to pay more in dividends than in share repurchases, it might significantly increase its dividend payment in the near-term.
Apple (AAPL, Financial) currently has a trailing price to earnings (P/E) of just below 15 with a forward rate of close to 11. Its PEG ratio is about 0.6, its price to sales is 3.66 and its price to book is 5.2.
Apple’s operating cash flow has incrementally grown over the past ten years. The year-over-year growth into the years 2009, 2010, and 2011 was 5.9%, 83%, and 101%, respectively. The free cash flow also incurred similar growth in the corresponding years but due to a larger increase in capital expenditures, the growth into 2011 was slightly less at 82.6%. When looking at the statement of cash flows, the main reason why Apple is not annually increasing its cash balance is that it chose to use a substantial amount of cash on investments. The 2011 cash used in the purchase of investments was almost 80% higher than in 2010. Even more has been spent into 2012 when considering the trailing-twelve-month (TTM) reports. If Apple were to have used the same amount spent on dividend distribution as it had on investments, shareholders would be looking at a $109.19 per share dividend. Of course, Apple would likely not distribute a 21% dividend. This relationship is meant to highlight its ability to pay. Even a fraction of cash invested would amount to a substantial dividend payment. I think that many investors are looking for an eventual dividend from Apple. However, it seems that Apple is still highly concerned with growth and will therefore invest much of its excess funds.
It is no secret that Apple is exceptionally profitable. First and foremost, revenue has been trending sharply upwards for the past several years. 2011’s reported revenue was 66% higher than in 2010 and it has shown even more improvement, being that the TTM revenue is now 18% higher than in fiscal 2011. Also, margins are doing well. Both the operating and net margins have shown a steady year-over-year improvement into 2011. In 2009, 2010, and 2011, the operating margin was 27.36%, 28.19%, and 31.22% and the net margin was 19.19%, 21.48%, and 23.95%, respectively.
Apple will soon introduce two new versions of already enormously successful products. The iPad 3 is coming out and is expected to perform better than the iPad 1 and 2. This is suggested because the iPhone 4S outsold very successful prior models. Also, the iPhone 5 will be coming out soon and will expectedly outsell its earlier models.
I don’t see much stopping Apple. Its enormous size creates benefits from economies of scale. Its growing capital contribution to research and development is working towards improving existing products and creating new innovative additions to its line. Its surge in investment related cash usage will expectedly further grow equity. Its profitability is in pristine condition. I think that most investors don’t see $500 as a selling price. If Apple can continue to grow profitability, the stock price will continue grow at its current rate.
International Business Machines (IBM, Financial) has a trailing P/E ratio of 14.8 and forward P/E of 11.75. It has a PEG ratio of slightly above 1 and price to sales of 2.1 with a price to book of 11.14. IBM also pays a $3.00 dividend at a 1.6% yield with a 22% payout ratio. This is slightly below the five-year average of 1.8%.
Over the past decade, IBM has undergone significant transformation. It has gone from a provider of discrete hardware products to a supplier of integrated business solutions. IBM’s hardware segment went from consisting of 40% of total revenue in 2000 to less than 20% at its current levels. It recognized that these businesses had shrinking margins and decided to go another route.
IBM has incrementally grown all margins over the past several years. From 2005 until 2010, IBM grew its gross, operating, and net margins by 15%, 76.6%, and 70.5% to 46.07%, 18.17%, and 14.85%, respectively. During this same timeframe, revenue grew by 9.6% while net income grew by 87%. This explains the increased margins. Most recently the TTM revenue grew 6.6% larger than in 2010 and the net income grew an additional 5.3% during the same period. Further concerning profitability, IBM has a huge return on equity (ROE) of just over 73%. However, it also has a debt to equity of 154.78%. This skews the optimistic size of the ratio. The return on assets (ROA) is a more modest 11.63%.
It is expected that IBM’s revenue growth will come from software and services, which are high-margin sources. This will in turn further drive margins upward. If revenue is driven in such a way, net income will increase at an even larger rate and I would expect the price to trend with earnings. I believe that 15 times earnings is a healthy multiple for IBM. If EPS were to grow, I believe the price will rise in unison to maintain such a multiple.
Microsoft Corporation (MSFT, Financial) has a trailing P/E of 11.4 and a forward P/E of 10.52. It has a PEG ratio of 1.38. It has a price to sales of 3.64 and a price to book of 4.08. Microsoft also pays a $0.80 annual dividend at a 2.6% yield. It has a modest payout ratio of 25%. This dividend trends in a positive fashion as the yield is above the five-year average of 2%.
Microsoft recently reached a new high of $31.55 on February 16. It is currently trading slightly below that high. Microsoft is commonly known as a company that is very profitable with hardly any debt. Microsoft’s ROE is roughly twice that of its 20% debt to equity ratio.
Over the past ten years, Microsoft’s per share dividend has incrementally increased while shares outstanding have trended on an incremental decline. Net income grew by 64.6% from 2007 into 2011 with a 36.1% dividend payment increase during the same period. Also during this period, operating cash flow increased by 51.7% while free cash flow simultaneously increased by 58.6%. The repurchase of shares has shifted over the last five years. 2007’s $26.6 billion share repurchase was 139% higher than in 2011. The 2011 cash usage to repurchase shares was more than twice of what it used to pay out dividends but much of the repurchase occurred in the beginning of the year because the TTM cumulative dividend payment is now 12.7% higher than the TTM repurchase. If Microsoft continues to pay more in dividends than in share repurchases, it might significantly increase its dividend payment in the near-term.
