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Apple Stock May Be Worth $1000 a Share to Peter Lynch

October 05, 2012 | About:

Legendary mutual fund manager Peter Lynch made his fame by generating outsized returns investing in growth companies. He is willing to pay up for faster growing companies. He famously said that he would rather pay a P/E of 20 for companies that grow 20% than P/E of 10 for companies that grow at 10% a year. This comes to the concept that we call “Peter Lynch Fair Value” in our valuation box. In determining the fair value of the companies, Peter Lynch used a rule of thumb which says that the fair P/E of growth companies is equal to its earnings growth rate, that is, He is willing to buy a growth company at a P/E multiple that is equal to its growth rate. Therefore, to Peter Lynch, at fair value, the PEG ratio of a growth company should be 1.

Because of this, the calculation of Peter Lynch Fair Value is very straightforward. It simply equals to the growth rate multiplied by its earnings. That is:

Peter Lynch Fair Value = Earnings Growth Rate * Earnings.

Therefore, if a company grows its earnings 20% a year, to Peter Lynch, its fair valuation is 20 times its earnings.

Now how much is Peter Lynch willing to pay for Apple (NASDAQ:AAPL) shares?

Apple has been able to grow its earnings per share at more than 60% a year, which is the result of tremendous revenue growth and margin expansion:

Apple earned more than $40 a share for the trailing twelve months. If Apple is worth a P/E of its growth rate of 60, the stock would be worth more than $2400 a share. Of course, Peter Lynch would only be willing to pay a P/E of 20 for the companies that grow faster than 20% a year. In this case, Apple shares would be worth about $1000 a share to Peter Lynch. Apple is now traded at around $660 a share, suggesting a 33% discount to Peter Lynch.

The historical Peter Lynch fair value for Apple stock is below:

Apple stock has been always traded at a discount compared with this fair value, but it did follow the trend in this chart. We don’t know if Peter Lynch owns Apple in his personal portfolio, but Apple is indeed a popular stock among the hedge fund Gurus we track. Owning this stock has definitely been rewarding.

Disclosure: The author does not have a position in Apple stock.

Peter Lynch Fair Value is a feature of GuruFocus Premium Membership. If you are not a Premium Member of GuruFocus, we invite you for a 7-Day Free Trial.

Rating: 2.7/5 (22 votes)


Yhlbb - 5 years ago    Report SPAM
Glad to see this article here (I like this site for the focus on Buffett and other "gurus"). Apple is an investment in which I am confident to put more than 50% of my net worth (like Buffett's fat pitch). I might be wrong and suffer a huge loss. But at least it's my decision.

If you take the more $100 billlion of cash Apple has into account, the stock is even cheaper.

BTW, Apple is the #2 world brand (only behind KO, a Buffett favorite).

Crosshair - 5 years ago    Report SPAM
“He famously said that he would rather pay a P/E of 20 for companies that grow 20% than P/E of 10 for companies that grow at 10% a year.”

Assume you have two Companies that will produce $10 at the end of their first year of operations. Now, assume Company A will grow those earnings at a 10% clip, while Company B will grow these at a rate of 20%. Assume both Companies’ operations will cease in their 10th year.

Now, assume you can buy all of Company A for 10x earnings ($100), and Company B for 20x earnings ($200). Do the math.

Buying Company A, the slower growing Company, at 10 times earnings will produce an internal rate of return of 8%. Paying up 20 times earnings for the faster growing Company will produce an internal rate of return of 4%.

Now, tell me, why am I better off owning the faster growing Company at 20 times earnings?

Yhlbb - 5 years ago    Report SPAM
If you own S&P500 index funds (or some popular big mutual funds), then you already own AAPL.

Apple will continue to grow as long as there is a very high demand for iPhones and iPads. Apple will focus intensely on maintaining superior user experience for both products (the proud creations of Steve Jobs). You are witnessing a transition from traditional PC/laptop kind of computing to touch based mobile computing. And, Apple is the creator and leader of products that facilitate this transition. If you don’t know how big the market for touch based mobile computing is, then you should not invest in Apple.
Jean-Francois Nobert
Jean-Francois Nobert - 5 years ago    Report SPAM
In invesment... Nothing fly to the sky.... Projecting past result could be really risky, else you wear a parachute... but wearing a parachute have a cost...

5minutes analysis....

According to the chart bellow seem like they are dependent on the iphone and the iphone seem to loose market share vs android but i could be wrong.

Tangile book 113$

Graham numer: 310$

Price to book: 5.6


Gartner's global smartphone market share figures



Cavalluk - 5 years ago    Report SPAM
Apple sells commodities and will eventually fall hard. I could easily see this stock dropping $200 in one day.
Cavalluk - 5 years ago    Report SPAM
Good luck with that!

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