Apple (AAPL, Financial) has been a significant value creator in the last few years, and the stock upside has always been backed by strong fundamental developments in the company. I have been optimistic on Apple in the past, while emphasizing on the point that I believe that Apple is a dividend stock more than a high growth stock. I expect the company’s current dividend payout of $2.08 per share to increase meaningfully in the coming years.
Apple's stock has been struggling in the last six months with the stock declining by 21.3%. Starting with the valuation perspective, Apple is trading at 10.5 times TTM PE and valuations are certainly not expensive. Further, the stock is trading at 9 times FY17 EPS and forward valuations also remain attractive. Investors will question why Apple is trending lower in the last six months even with attractive valuations, and my answer is the point I mentioned at the onset.
Market participants should not expect Apple to be a high revenue and EPS growth stock. Instead, muted growth is likely and free cash flow will remain robust. Of course, there will be quarters where new product launch results in revenue and earnings bump-up. That surprise element always remains with technology-based stocks. Even with attractive valuations, this is the reason for Apple trending lower.
Reuters today reported that Hon Hai Precision Industry, which assembles the bulk of Apple’s latest smartphones, saw December revenue decline by 20% with full-year sales also missing expectations. This casts some doubt on the company’s upcoming earnings. However, I do believe that the stock decline in the last six months has largely discounted this concern.
The next point that is worth discussing is the product launch pipeline for 2016. As I mentioned earlier, the company’s revenue bump-up comes at product launch, and this is the key growth trigger for the company. According to an article from BGR, the Apple iPhone 7 is slated for release in the second half of the year and Apple Watch 2 is likely to hit stores in the first half of 2016. Besides upgrades on other products, these might be the major product launches for 2016. Anything beyond this will is likely to surprise the markets positively.
While new product launches can help sustain revenue growth momentum, I see global slowdown as one concern and the company’s sales in emerging markets can be relatively muted. Therefore, there are bullish and bearish factors that will impact the stock in 2016.
From a shareholder perspective, the correction can be used to gradually accumulate the stock. I see the following points from a value creation perspective:
- Current dividend of $2.08 per share will increase in 2016 and dividend investors can consider buying at current levels.
- The company’s aggressive share repurchases will continue as free cash flows are likely to remain robust. This will have an incremental positive impact on EPS.
- New product launches can trigger revenue upside, but a lot will depend on the product pricing as consumer willingness to pay might be curbed (relatively) in weak economic environment.
Overall, Apple is a good buy at current levels and on any further correction. I would gradually accumulate the stock as broad market conditions also remain uncertain, but the value creation story is far from over.
Disclosure: No positions in the stock.
